If we assume the market will one day rise again, and growth will return to favour, how does one set up their portfolio for that inevitability? Here are five strategies to consider.The urge to hold cash right now is probably very high. With many stocks down 60 per cent this year, cash looks attractive, even after considering the loss of purchasing power from inflation. But you need to own something other than cash to maximize potential returns in a market recovery.
Cash is paying close to five per cent , but there are stocks that will double or triple when the market shifts to bull mode. Smart investors know to buy when everyone else is selling, and that is certainly the case today.Many investors dipping their toes into a bear market will start with ultra-conservative stocks, such as those in the consumer staples and utilities sectors. That’s one strategy, but investors need to look at growth stocks, and smaller companies , if they want really big returns.
Growth stocks are absolute pariahs right now, and stocks that used to be 50x sales are now 3x sales. Many companies are still growing at 50-plus per cent, even in a weakening economic environment. Don’t forget that in a recession, investors will likely payLook for companies growing at 50 per cent today . Even in a recession, many of these will still grow at 20-plus per cent, and that might be very attractive to investors when the economy is contracting.
Many companies’ valuations in these sectors are creeping up to high historical levels. Companies with historical average price-to-earnings ratios in the 15x range are seeing valuations bump above 20x. A change in valuation can still result in large losses, even with safe stocks. We would caution against loading up on safe sectors. Keep diversification in mind. Everybody has to eat, but because of low margins, inflation and higher interest rates can have a serious negative impact on food companies as well. No one wants to see their safe stock decline 25 per cent because they paid too much for it.