The stock market has been on a strong run since the start of 2023 with the Standard & Poor’s 500 (S&P 500) index topping new all-time highs several times this year. Many investors and traders are betting that this momentum can continue, as interest rates seem to have nowhere else to go but down. But if that momentum falters or rate cuts don’t occur, a pricey stock market could tumble quickly.
In this kind of environment, what should investors be considering? Bankrate’s First-Quarter 2024 Market Mavens survey asked experts how investors should navigate the current market, particularly with the rapid run-ups that large-cap tech names such as the Magnificent Seven stocks have received.
The survey also asked how investors should use income from investments such as dividend stocks and CDs in this environment. Should investors with a long-term orientation reinvest into high-yielding and safe cash investments or put it to work in assets with historically higher long-term returns?
How the pros say to play the market’s strong momentum
With the S&P 500 surging to new all-time highs in 2024, it seems to be marching ever higher on the back of strong investor interest in large-cap tech names such as Apple, Microsoft and Amazon. These stocks have demonstrated what investors call “strong momentum,” powering higher week after week and attracting more and more dollars as investors seek to ride the momentum higher.
Of course, this trend could prove dangerous if the valuations on momentum stocks become too stretched or investors lose faith in its underlying drivers, such as artificial intelligence (AI). If so, the momentum darlings could quickly retreat with the momentum swinging to the downside. So, successful momentum relies on timing the market well rather than buying and holding positions.
The pros in Bankrate’s Market Mavens survey recommend a variety of strategies in the face of the momentum in large-cap tech stocks, including diversifying and not participating in it at all.
“Momentum investing is certainly a reasonable investment philosophy,” says Brad McMillan, chief investment officer, of Commonwealth Financial Network. “As long as the position is right-sized based on the potential return and risk that an allocation would add to a portfolio, we believe there is a place in a well-diversified portfolio. That said, the key to momentum investing is getting the timing right and that is certainly not easy.”
“By definition, momentum investing works until it doesn’t, which is why it is so risky,” says Charles Lieberman, chief investment officer, Advisors Capital Management. “Some of the tech companies have excellent prospects, but that is recognized by the market, so they are highly valued. But even a slight falter in their prospects exposes them to large declines.”
But other experts think investors are best served by avoiding momentum investing entirely.
“Momentum is dangerous at all times, but especially when it is driven by a tech rollout,” says Kim Forrest, chief investment officer and founder, Bokeh Capital Partners. “No one knows when generative AI will slow spending, but when it does, the stocks that are tagged as participating will get killed.”
“As a long-term fundamental investor, there is no place for momentum investing in my world,” says Michael K. Farr, president and CEO, Farr, Miller & Washington. “I would advise individual investors to allocate only a small percentage of their investable dollars to momentum strategies.”
Still, others believe that the fundamentals of tech stocks are fine while acknowledging the risks.
“I think it is still ok to invest in momentum stocks with strong fundamentals,” says Chuck Carlson, CFA, CEO, Horizon Investment Services. “These stocks are still showing top- and bottom-line growth.”
Rather than using momentum investing in a theme such as AI, it’s better to use diversification to capture multiple themes, suggests Dec Mullarkey, managing director, SLC Management.
“Better to invest across all investment themes by buying the market index,” he says. “If investors are switching themes, that may have little effect on your overall index performance as you hold the stocks they are targeting.”
One easy way to do that is to buy a broad-based index fund based on the S&P 500. The index has returned about 10 percent over long periods of time.
How the pros suggest you reinvest your investment cash
With strong returns in cash now such as in high-yield savings accounts and CDs, as well as dividend investments such as stocks and funds, investors may have a lot of income on their hands. The Bankrate survey asked the pros how long-term investors should be deploying the cash now.
The pros recommend that investors think carefully about the returns of different asset classes and their own needs. For example, stocks deliver strong long-term returns but are volatile in the short term. Bonds deliver moderate returns with less volatility, while returns on cash accounts such as CDs and savings accounts now have decent returns without volatility.
“Asset allocation is generally very important in investment performance over time,” says Farr. Farr advises investors to figure out what they need in terms of returns and liquidity and what they’re willing to endure in terms of risks. With higher returns on safer assets now, Farr stresses that investors need to carefully consider where those fit into an investment portfolio.
“Longer-term investors would likely post greater total returns with income-oriented stocks than with CDs since stocks not only earn income but also offer price-appreciation potential,” says Sam Stovall, chief investment strategist, CFRA Research.
“Stocks win over any kind of reasonable long-term horizon,” says Lieberman. “Holding CDs is appropriate only for expected short-term cash needs or to guard against unexpected large expenses.”
Other pros cite more specific stock strategies as great ways to drive long-term returns.
“Incorporating a dividend strategy is a worthwhile pursuit for any investor with a longer time horizon,” suggests Patrick J. O’Hare, chief market analyst, Briefing.com.
One great place to get cash income and diversification is with the best dividend ETFs.
“If you have a long-term horizon, then growth is more important than income,” says Mullarkey. “Therefore at the most basic level, you would allocate most of your assets to growth opportunities like equities and have a modest allocation to fixed income such as bonds or cash.”
“The general principle, that younger people should invest more in equities for retirement and then rebalance to fixed income as they get closer to retirement, still holds,” he says.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
This article originally appeared here and was republished with permission.
