The stock market seems to be recovering from the recent mini-crash.
Many are already saying that the worst is over, and therefore, it’s time to buy the dip.
I disagree.
And not on whether it’s over. I don’t believe that this correction qualifies as a dip.
The S&P 500 declined by a mere 7%. Real buy-the-dip opportunities occur during declines of 10% to 20%.
Meaning that this panic we’re seeing is exaggerated. It’s just noise and the financial media being desperate for a story.
I wrote about when it’s time to panic on Friday. You can read my thoughts here.
Nonetheless, I think there’s a high chance we see a real correction occur over the coming weeks. Maybe what’s going on now is the start of that.
The fall brings with it significant headwinds for the markets, namely in the form of U.S. elections and a potential second wave of COVID infections.
Both are risks you shouldn’t ignore, as they could change the sentiment around economic recovery.
So, with the chances of a much deeper correction increasing, we should prepare a plan in advance to profit from it.
That’s why I’ve developed the following strategy.
The Big Dilemma
As we near the end of this recession, everyone is asking themselves the same big question.
Should one invest in the beaten-down sectors—those depending on re-opening and the global economic recovery—or stick with the COVID winners—tech stocks with robust balance sheets and excellent growth projections.
Choosing the former makes sense because such sectors typically do well after a recession when people return to their spending habits. Moreover, these stocks are trading cheaply compared to the overall market.
On the other hand, if this crisis persists longer than expected, then buying the COVID winners is a better choice, even if one pays a premium for them.
But there is also a third option, and it’s the one I plan to take—it’s choosing both.
And the way to do it is by applying something called a barbell strategy.
My Buy-The-Dip Stock Portfolio
Barbell strategy is an investing approach where you buy equal parts of the riskiest and the safest trade on offer. That way, you can benefit from any outcome.
There are many ways to go about it, depending on the situation.
For example, you could combine blue chips and IPO stocks, micro-cap stocks and investment-grade bonds, or defensive sectors such as the utilities with highly cyclical sectors like the industrials.
In the current case, I plan to combine the riskier re-opening trade with the safer COVID-winners trade, each representing one side of the barbell.
The riskier part will consist of stocks from sectors industries like manufacturing, basic materials, travel, auto, and the financials. These represent the best value in the market. However, they will perform poorly if the crisis continues.
That’s why for the second part of my barbell, I’m choosing stocks that represent trends like work from home, digital economy, e-sports, streaming services, cloud, ecommerce, home improvement, and healthcare. Basically, what’s worked so far. Albeit these are more expensive, they provide the benefit of secular growth, and are, thus, a much safer bet.
That said, I will maintain a large position in precious metals and a smaller portion in cryptocurrencies. Those are not part of my barbell. But both are in a multi-year bullish trend, so there’s no reason for me to exit those trades.
You can read more about my thoughts on gold and silver here and on cryptocurrencies here.
Good investing,
Leon Wilfan
For Cashflow For Retirement
