One week the market is up, the next it is down. The stock market appears range bound. It has been unable to break out and rise above Dow 11,000. Many investors feel lost and have no idea how to invest in the current marketplace. There is no need to worry. All you need is an effective game plan to get you through these times of uncertainty.
Here are a few tips for investing in an uncertain market.
1. Buy undervalued blue chips.
The best stocks to buy when fear is running rampant are companies with strong cash flows and a solid balance sheet. These stocks are able to weather the storm. Companies like Intel are where investors should turn to for safety. Buy companies that dominate their sector, have a great balance sheet, and are selling at a discount to their true value.
2. Buy high yielding stocks.
The last 10 years have been known as the lost decade for stocks. The Dow Jones Index and S&P 500 have not advanced at all. So, how can you earn a positive return when market indices are stagnant? Buy a dividend paying stock. Companies like Verizon and AT&T offer huge dividend yields that will offer income to investors. Even if the stocks do nothing, a 6 to 7% dividend return on your money is pretty good.
3. Build your cash reserves.
Increase your cash holdings when you are nervous about the stock market’s direction. If your current portfolio has 5% in cash then increase it to 10%.It’s time to book your gains when you are worried about a market decline. Why hold onto a stock that you think is headed lower? You can sell it high and use the cash proceeds to buy back in at a lower price on a later date. Besides building a cash cushion will help you sleep comfortably at night.
4. Become an options investor.
If you want to hold onto your shares but are worried about a market drop then buy some puts. Put options are a great way to protect your portfolio from a price drop. A put option gives you the right to sell shares at a specified price. If the market takes a drastic turn downward, you can rest comfortably knowing that you are protected.
5. Sell your high beta stocks.
The time to sell your risky speculative investments is when you think that they have peaked. High beta investments get hit the worst during market crashes. Investors have a tendency to become risk averse during turbulent markets and will bail on these stocks first. If these companies survive the swoon, you can always get back in after the market stabilizes.