If the wild ride in the U.S. stock market in recent months has you feeling queasy about investing, it’s time to develop an iron stomach. Rather than steering clear of stocks, right now is as good a time as any to invest in the market — provided you’re in it for the long haul.
To be clear, there’s no guarantee the worst of the recent market volatility is over yet. But there are plenty of opportunities to invest in stocks right now if you’re willing to take a more tactical approach. In practical terms, that means finding attractive investments within specific sectors of the U.S. market or diversifying your portfolio to include smaller companies or international exposure. (New to this? Get some background on investing in stocks.)
Spoiler alert: We won’t recommend individual stock picks here. Why not? Generally speaking, you should be skeptical of “hot tips” dispensed on the internet. What’s more, it’s important that you believe in the investment merits of any potential addition to your portfolio, as opposed to its get-rich-quick potential. Finally, a mutual fund or exchange-traded fund is more the speed for many investors.
Here are the best stocks to invest in now, according to professional investors.
Expect continued economic growth ahead? Try these sectors
Broad market index funds (such as those tracking the S&P 500) are a proven — and successful — way to invest in the stock market over a long time period. But your investment strategy needn’t end there, and the recent sell-off in U.S. stocks makes for a good opportunity to parse up the market.
The S&P 500 is commonly divided into 11 sectors, such as information technology, health care and energy companies. This can be a starting point for deciding where to invest money right now.
Even in the wake of February’s market correction, some sectors of the market still look very attractive for investment, according to Denise Chisholm, sector strategist at Fidelity Investments. While the U.S. economic recovery is getting “long in the tooth” nearly nine years in, growth still is healthy. At the same time, corporate profits are in the early stages of what’s likely to be a multiyear period of growth, and that may provide a necessary refresh for some stocks, she says.
Looking to the next 12 months, investors should favor stocks that are levered to the economy or economically sensitive, Chisholm says. Her latest analysis of the various sectors — which takes into account each group’s business cycle, fundamentals, relative valuations and relative strength — puts technology and consumer discretionary stocks on top.
To buy into these sectors or increase exposure, the easiest approach is to buy equal-weighted index mutual funds or ETFs that track these specific sectors, Chisholm says. Why equal-weighted? So your performance isn’t subject to the whim of big companies, she adds.
Alternatively, you can do the due diligence to identify particular stocks within particular sectors. That’s a strategy the investment team at Huntington Private Bank deploys. Randy Hare, director of equity research, also says technology and consumer discretionary stocks currently are attractive, in light of the recent market sell-off.
Technology stocks are likely to see strong earnings growth ahead, while consumer stocks will benefit from tax cuts for consumers, Hare says. As for how to play these sectors, Hare recommends service-oriented technology companies — like payment processors or those specializing in outsourcing services — and consumer-oriented travel and leisure companies such as cruise lines or hotels and some retailers, like dollar stores.
Expect rockier times ahead? Try these sectors instead
If you don’t buy the notion that the U.S. economy, corporate profits and stocks are poised for further growth in the next 12 months, there’s another approach: Get defensive. For tactical investors, this strategy focuses on buying sectors that aren’t as economically sensitive because demand for these companies’ products or services remains relatively steady, irrespective of what’s happening in the economy.
Generally speaking, the defensive sectors are considered to be health care, telecommunication, utilities and consumer staples stocks. Among these, Chisholm says “health care pops to the top of the defensive bucket.”
And investors needn’t make an either-or choice between defensive and cyclical sectors — in fact, professional active fund managers have been favoring a mix of both in recent months. Technology, consumer discretionary and health care stocks were the three most-favored sectors as of February, according to figures from Bank of America Merrill Lynch.
Go small — or go away from home
A final way to add diversification to your portfolio is by investing in smaller companies — or markets outside the U.S. Such strategies are beneficial for reducing your overall risk, regardless of the recent market turmoil.
Earlier in the year, Huntington Private Bank started increasing its weighting to U.S. small-cap stocks, Hare says. That’s because these companies “are more domestically focused, they’re a little less exposed to trade issues, and earnings growth is accelerating faster” relative to large-cap stocks, he adds.
Hare and his colleagues also increased exposure slightly to developed international markets earlier this year by buying diversified ETFs or mutual funds.
Why buy the dip
While experts advise that you don’t try to time the market — guessing when stock prices have bottomed or peaked — that shouldn’t preclude you from being opportunistic. The U.S. stock market has proved to be a fantastic long-term investment, offering an average annual return of about 10% over the last century, so don’t let the prospect of more volatility keep you on the sidelines.
Dollar-cost averaging, a strategy of spreading out your investments in the market at regular intervals, will inherently capture some of the buy-the-dip opportunities right now. Or making a conscious decision to dive into the market — such as with your tax refund, Hare says — is another way.
No matter what you do, buying when the market has experienced sharp corrections — like the one in February — has been a successful strategy based on similar periods going back to 1960, Chisholm says. “There’s a reason we say buy the dip — because it works.”