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3 Paths to Outperformance - Weekend Wisdom

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These are unique times.

And it calls for unique investment strategies to be successful.

My goal today is to solidify what makes the current investment landscape so tricky. Then provide 3 clear cut strategies to help you not just survive, but thrive in the years ahead.

Strange Days Indeed

The American economy is amongst the most dynamic on the planet. We are either enjoying glorious boom times like the late 1990s. Or suffering horrific busts like the Great Recession of 2008/2009. Yet now it seems to be neither.

Instead we are limping along at an anemic GDP growth rate of just +1 to 2%. Never high enough to call it a boom. Never low enough to call it a bust. Instead it has earned monikers like "The New Normal" or "Muddle Through Economy" . (I prefer the latter).

Because investors are so used to the previous boom and bust cycles they keep misreading the economic signals. That causes them to predict looming recessions that don't materialize. Unfortunately they don't know that until after stocks have already declined 20% or more.

This is followed by massive rallies back up to previous highs and often beyond. But then the strength of the economy is never as good as it seems, leading to the next pullback.

Rinse and repeat. Rinse and repeat.

Gladly there are 3 ways to profit in this environment. They have pros and cons. So be sure to review the merits of each before putting your hard earned money to work.

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Strategy #1: Timing Trades

Given that the Muddle Through market is prone to big bull and bear runs, then market timing these moves could work out very well. In a perfect world you would precisely see the top for the market and go short to profit on the way down. And then expertly shift gears and go long for the ride back up.

Pro: Would make the most profit of all the strategies if timing done right.

Con: Would LOSE the most money if done wrong.

Conclusion: If you have perfected market timing moves in the past, then this is the one for you. However, if your track record is spotty, then don't kid yourself as you will get slaughtered. Better select strategy 2 or 3.

Strategy #2: Buy and Hold

With the economy expanding, even at a modest pace, it leads to corporate earnings growth. That, in combination with low rates of returns on cash and bonds, gives an upward long term bias to the stock market.

That is why it can be effective to load up your portfolio with fundamentally sound stocks (Zacks Rank 1 or 2, attractive valuations, improving earnings growth, etc.) and then just hold on through the peaks and valleys with the expectation that the general upward bias of stocks works in your favor.

Pro: Produces quality profits over the long haul.

Con: Not for the faint of heart as there will be times you are down 20-30% when those bear runs come along. Also, if there truly is a recession, and you hold too long, then your losses could be massive.

Conclusion: More realistic route to profits than #1. But may be too risky for some who are more conservative. Or need to use that investment fund as a source of income 5-10 years down the road.

Strategy #3: Dividend Stocks for High Total Return

Right now cash accounts (checking, savings, CDs and money markets) pay next to nothing in interest. And Treasury bonds aren't paying much better. In fact, with these investments you are actually losing money relative to the rate of inflation. This makes high dividend stocks all the more attractive.

And gladly there are still plenty of stocks providing hefty dividends of 3%, 5% and even up to 10% a year. Many of these are solid growth companies that will still enjoy some capital appreciation to boot.

Pro: Safest, surest and most consistent route to outperformance given combination of both capital appreciation and dividend income. It would also preserve your nest egg the best when the next recession and bear market comes around the corner.

Con: You may feel underwhelmed by this strategy when the big bull runs take place. (However, your nerves will be calmed once again when the next ferocious bear returns).

Conclusion: This strategy is not just for conservative investors anymore. The odds of success are tilted in your favor because of the ultra low rates of returns on cash and bonds thanks to Fed interventions.

What to Do Next?

I don't think you should do all 3 strategies at the same time. Rather I think most investors should decide on doing just strategy #1 or #2 with the aggressive part of their portfolio. Then the dividend strategy outlined in #3 can be employed for the safe part of the portfolio (what we often call the "nest egg").

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It digs out rare stocks with growth potential that are not only paying high dividends now but are likely to do so for many quarters to come. Then it adds other low-risk vehicles like MLPs, REITs, Covered Calls and special ETFs to fly past fixed income investments that actually lose out to inflation.

The goal is a steady, market-topping flow of returns through all conditions, and especially during pullbacks and volatile periods like we've seen in the past.

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Wishing you great financial success,

Steve

Steve Reitmeister is the Executive Vice President in charge of Zacks.com and all of its services for individual investors. His personal mission is to help investors achieve life-changing investment success by harnessing the power of earnings estimate revisions. Now he is pleased to share with you a new approach to outperformance. Learn more about Zacks Income Plus Investor .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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