Last Updated on January 18, 2021 by Henry John
A new president is going to be inaugurated next week, we’re struggling to distribute vaccines, the unemployment rate is skyrocketing, and the economy is still struggling and far from recovering.
There’s a growing lack of optimism in the market among investors, and it doesn’t help that the S&P 500 and Dow posted its first weekly decline amidst the growing pessimism surrounding the market now.
Sentiment plays a major role in the stock market. And according to a quarterly Financial Survey of experienced investors by E-Trade Financial Holdings, “Two-thirds of investors (66%) think we’re fully or somewhat in a market bubble”. Although, “more than half of surveyed investors (57%) are bullish”.
The President-elect Joe Biden’s $1.9 trillion stimulus plan coupled with the latest disappointing earnings report from some of the major U.S. banks, added fuel to the growing pessimism and ensured that last week closed in red ink.
Investors and Traders are reassessing strategies as they look to steer their portfolio higher up in the green zone. And there is a promising way experienced stock investors are kicking off the quarter: Investing in large-cap stocks while holding lots of cash.
When there is growing uncertainty in the market, experienced investors tend to take refuge in large-cap stocks because of their less volatile nature. And what we are experiencing right now is a growing pessimism, hence, it’s only normal, historically, for experienced investors to take a more defensive posture in building out their portfolio.
Investing in large-cap stocks gives investors great deal protection in an uncertain market environment, however, having enough reserved cash will give an investor the opportunity to easily go from defense to offense in the advent of a market crash.
In 2020, cash proved to be King during the market crash. And if the market crashes again in 2021, cash will make a huge difference.
Nonetheless, in case of a 2021 market crash, cash can only be King again if the market rebound in similar fashion as in 2020.
But won’t inflation affect the reserved cash?
Whether you keep your money in the stock market inflation does affect the stock price. Moreover, the rate of inflation is currently at 1.4% according to U.S. Labor Department data published recently, and for most individual investors with less than 1 million in the market, the effect may prove to be insignificant.
Moreover, amidst a stock market crash, there is always the opportunity of buying undervalued stocks, stocks that are forced down to their book value or even below their book value. And when the market bounce back, these stocks’ growth will cover the effect of inflation while giving your portfolio a huge boost.
How I’m approaching the market amidst the turbulence
I started selling stocks in my portfolio that are relatively overpriced, most of which are up by as much as 10% YTD, increasing the percentage of cash in my portfolio to over 30%.
Himax Technologies (NASDAQ: HIMX) was the first on the list, lucky for me I went out before it dived on Friday. And I’m still holding on to General Motors (NYSE: GM) come what may.
As we take a break while celebrating Martin King’s day, we should reorganize and perhaps take a defensive position, while waiting to be more certain before taking offensive positions.