Growth Vs Value
Many in the financial community are talking about a massive shift from growth stocks (like the companies that have done well during the pandemic such as the FAANG stocks) to value stocks, or the companies that have been beaten down most of the year and have suffered during the pandemic (the so-called "reopening plays" like travel including airlines, leisure including cruise lines and movie theaters, physical retail, restaurants, hospitality, commercial real estate, etc.). I don't think it's a good idea to chase one or the other, but rather take a balanced approach.
This growth vs value notion shifted into high gear with the announcement last week of the first COVID vaccine from Pfizer/BioNTech that is 90% effective in preventing infection, a very significant medical breakthrough. This, coupled with an apparently "divided government" election result in the US, with the Senate likely to retain a Republican majority, a reduced Democratic majority in the House of Representatives and a Democratic President (thereby reducing the risk of dramatic changes to the status quo), were powerful positive catalysts for the stock market last week. More good news on unemployment and company earnings helped further boost the stock market last week, continuing a rally that started just before the presidential election. The market has whipsawed a few times over the past couple of weeks, moving from fear to optimism about COVID as the number of cases continue to grow exponentially across the country, with no end in sight. There have also been notable shifts back and forth between value and growth. This will likely continue to fuel the market volatility that we have seen for months now.
Many professional investors recommend diversified portfolios to weather any storm and also recommend a "barbell" approach, which includes some growth stocks and some value stocks in your portfolio to take advantage of whichever direction the market wants to move from week to week or month to month. What seems most likely is that the market continues to anticipate future economic recovery and with the introduction of additional fiscal stimulus (which is more of a question of when not if and how much), this should set the economic recovery on a more solid foundation. The low interest rate environment looks like it will persist for a couple of years based on recent Fed comments and so there are really few good alternatives to the stock market for your investable cash, other than perhaps Bitcoin or gold.
While there may be a rotation going on, you can't ignore the long term growth story of companies like Amazon, Apple, Facebook, Netflix, Google and Microsoft and so they still deserve a place in anyone's portfolio, especially if they become "oversold." If you can't afford the shares, consider buying fractional shares of each stock, which many brokerages offer or better yet simply buy an ETF like QQQ that focuses on the Nasdaq 100, which would give you plenty of exposure to these names and many other quality non-financial companies. If you are prepared to hold long term, the return of QQQ is likely to be much higher than the market in general. Still, if you are interested in capturing the rotation without having to pick winners and losers, another idea is to simply buy an S&P 500 ETF like SPY. Although selling in the tech stocks tends to drag the S&P 500 down, buying in value names will have the opposite effect and at some point, when the broader market is in balance and rallying together you could see some nice gains. Also, small cap stocks seem to be poised for a breakout to the upside as the economy recovers and these stocks tend to out perform other stocks during recoveries - the Russell 2000 ETF IWM is a good way to participate in this upside.
Once you own these ETF's you can make some extra money by selling covered calls on them, which especially for SPY and IWM will likely be bid up if the rally continues. You can get some nice cash flow in this strategy, although the shares will get called away upon expiration if the market continues to rally. However, this allows you to either buy again or buy something else. If the calls expire out of the money, you keep the premium and can sell more while you wait for share growth. Selling covered calls has been one of my favorite and most profitable option strategies.
The Financial Fortress approach would ensure that you are broadly diversified across asset classes and your stock trading portfolio should not be a large component of your overall financial picture, so even if you suffered heavy losses (which shouldn't happen if you are managing risk appropriately), the impact to your net worth should be minimal. The diversification in your stock trading portfolio need not include other asset classes like bonds or real estate, unless you don't have exposure to those areas in other parts of your Financial Fortress. I'm not recommending any particular stock or strategy.
I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020. To see all my books on investing and leadership, click here.
Stay safe, healthy and positive.