When the market is uncertain, investing money wisely is your best option

Investing money wisely is all the more important when there’s a highly uncertain stock market outlook.

When there’s market uncertainty, some investors feel tempted to “go into cash,” as the saying goes—that is, sell some or all of their stocks, and hold the proceeds in cash until the uncertainty subsides and the outlook is clearer. However, going into cash in reaction to uncertainty is rarely a good idea. By the time the uncertainty subsides, stock prices may have gone a lot higher.

Investing money wisely: Avoid the desire to “go into cash”

Our view is that you should only go into cash when you can’t find any stocks that look attractive enough to buy.

After all, uncertainty creates stress, and going into cash can relieve stress. You might even get lucky—prices may fall after you sell, and you may manage to buy back in at a lower price. But in the long run, going back and forth between stocks and cash is all but certain to cost you money.

If you could consistently spot good times to get in or out of the market—that is, sell at a relatively high point, and buy back in at lower prices—you could easily earn 10% to 20% per year on your money. You could make even more if you employed margin buying or other forms of leverage. The situation raises an obvious question: if a return like this is possible, why would you work? Why would anybody work?

This same principle just about guarantees that you’ll eventually lose money as a short-term trader, regardless of whether you try to trade stocks, or futures or foreign currencies.

Investing money wisely with our three-part Successful Investor method

First, invest mainly in well-established companies. When the market goes into a lengthy downturn, these stocks generally keep paying their dividends, and they are among the first to recover when conditions improve.

Second, avoid or downplay stocks in the broker/media limelight. That limelight tends to raise investor expectations to excessive levels. When companies fail to live up to expectations, these stocks can plunge. Remember, when expectations are excessive, occasional failure to live up to them is virtually guaranteed, in the long term if not in the short.

Third, spread your money across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities). This helps you avoid excess exposure to any one segment of the market that is headed for trouble. This will also dampen your portfolio’s volatility in the long term, without the shrivelling in its potential that you’d get if you invest significantly in bonds yielding little more than 4%.

Our portfolio diversification approach gives you strong potential for long-term gains

If you diversify as we advise, you improve your chances of making money over long periods, no matter what happens in the market.

For example, manufacturing stocks may suffer if raw-material prices rise, but in that case your Resources stocks will gain. Rising wages can put pressure on manufacturers, but your Consumer stocks should do better as workers spend more.

If borrowers can’t pay back their loans, your Finance stocks will suffer. But high default rates usually lead to lower interest rates, which push up the value of your Utilities stocks.

As part of their portfolio diversification strategy, most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

For example, conservative or income-seeking investors may want to emphasize utilities and Canadian banks in their portfolio diversification, because of these stocks’ high and generally secure dividends.

More aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks. For example, more aggressive investors could consider holding as much as, say, 25% to 30% of their portfolios in Resources.

However, you’ll want to spread your Resource holdings out among oil and gas, metals and other Resources stocks for diversification and exposure to a number of areas.

Deciding when to sell and investing money wisely

There is no foolproof way to decide when to sell. That’s why we advise you to apply our method, which lets you profit with minimal buying and selling. Of course, as a long-time market observer, I always have an opinion on whether you should buy or sell. I recognize—you should too—that I don’t get it right every time. Neither does anybody else.

You should only invest in stocks if you can afford to hold for a lengthy period—three to five years, say.

Are you investing money wisely in the stock market? What strategies have worked for you? Share your experience with us in the comments.