It’s safe to say the stock market closed out the first week of 2019 on a positive note. Thanks to Friday’s strong jobs report, which allayed investors' concerns of a looming recession and a slowdown in the U.S. economy, the bulls took back the reins.
Friday’s much-needed market surge pushed the Dow Jones Industrial Average more than 750-point higher intraday. Led by a 4.3% rebound in Apple (AAPL) and its FAANG peers — Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOG , GOOGL) — the Nasdaq Composite Index added 4.4%, while the S&P 500 index climbed 3.4%.
On the year-to-date basis, all three indexes are in the green. So far, so good, right? The tug of war with the bears has only just begun, however. And for long-term investment success, there are several strategies investors should adopt amid a period where extreme market volatility will be the norm.
To navigate this environment, I provided two mistakes investors should avoid. Conversely, here are two investing strategies investors should embrace.
Strategy No. 1 — Adopt a passive approach
If you are number cruncher, analyzing last year’s stock performances of some of the most closely-followed companies and sectors can either be a fun exercise or an excruciating one. Breaking down company report cards of stocks that were overhyped or unloved in 2018 has yielded some interesting results, especially with all three indexes posting losses in 2018. Arguably, everyone’s consensus list of stocks to buy have gone (for the most part) in opposite directions.
Accordingly, there are tons of stocks that will emerge as strong upside surprises in 2019 while some will wallow in disappointment. Stock picking brings to light the strongly-debated topic between “active vs. passive” investing. There’s nothing wrong with adjusting or rebalancing your portfolio when the market takes a turn for the worse.
But doing too much and too often can have the opposite effect. Some investors believe that unless they are churning their portfolios with each dip (or spike) in the S&P 500 they're not doing enough.
The best course of action, particularly during market declines, is to do very little or nothing at all, according to TD Ameritrade chief market strategist JJ Kinahan. A market downturn should be viewed as just “a bump in the road,” if investors have a time frame of two years. Sure, it may be difficult or even excruciating to just sit on your hands and watch your stocks decline without taking action. But there is overwhelming evidence that the active stocks pickers consistently underperform the S&P 500 index.
Strategy No. 2 — Increase dividend investing
There continues to be strong debate as to whether the current environment is a good time to get back into the market. Given last week’s rebound, as mentioned in the opening, the bulls have offered their opinion. But has the “all-clear" signal been given? As an unabashed market bull, particularly one who believes stocks have the potential to rise 20% over the next 12 months (on valuations alone), I continue to advocate for buying stocks.
That said, buying quality companies, particularly dividend payers, is even more important during turbulent periods in the stock market when there are seemingly no safe havens. Stocks that pay dividends become great places to be. Not only are dividend payers a source of guaranteed market returns, the fact that large funds (for the same reason) migrate to them when they exit out of of high-risk growth stocks, ensuring some level of stability.
What’s more, dividend-paying stocks — even those with relatively low payout ratios, the percentage of earnings committed to dividend payments — have time-tested business models. This means the management team and board of directors would not opt to share a percentage of profits with investors if they didn’t believe the business was healthy and would remain healthy during market downturns.