Forget gold. I’d follow these 3 steps to capitalise on a stock market rally

Buying a diverse range of cheap, high-quality companies could be a sound means of capitalising on a stock market rally, in my opinion.
The post Forget gold. I’d follow these 3 steps to capitalise on a stock market rally appeared first on The Motley Fool Australia. –

3 asx shares to buy depicted by man holding up hand with 3 fingers up

A stock market rally can never be guaranteed. The past performance of indexes such as the FTSE 100 Index (FTSE: UKX) and S&P 500 Index (SP: .INX) shows that they have experienced significant volatility and periods of decline. As such, defensive assets such as gold have proved to be popular among risk averse investors.

However, the stock market has delivered high single-digit annual total returns over recent decades, despite its periods of decline.

Therefore, a long-term investment horizon that seeks to purchase a diverse range of cheap, high-quality businesses could be relatively profitable compared to holding other mainstream assets.

Diversifying in a stock market rally

While risk reduction may not be the foremost thought for all investors when deciding how to capitalise on a stock market rally, it could be the most important aspect of investing. After all, it is all too easy to lose money from poor performances from a small number of holdings that can negatively impact on a portfolio’s prospects.

As such, buying a wide range of stocks that operate in different industries and geographies could be a sound move. It may mean lower company-specific risk, which is the threat of one holding dragging down the performance of an entire portfolio. It may also lead to a broader range of growth opportunities being present within a portfolio that enhances its returns in a rising stock market.

Buying high-quality businesses

Purchasing high-quality businesses may also be a logical move in a stock market rally. Clearly, deciding what are attractive companies is open to debate. However, companies with sound financial positions and wide economic moats could be a good starting point. They may be able to deliver relatively strong profit growth that enables them to command higher valuations than their peers.

Furthermore, financially-sound companies may be better placed to survive a period of volatile economic and stock market performance. As the last year’s events regarding coronavirus have shown, the future performance of the world economy is very unpredictable. This makes holding higher-quality companies even more important.

Purchasing cheap shares

Buying expensive shares in a stock market rally may mean limited scope for capital gains. Of course, even highly-valued companies can become even more expensive. However, the past performance of the stock market suggests that many companies (but not all) revert to their average valuations over the long run. This means that buying stocks with low valuations may provide greater scope for capital appreciation versus purchasing highly-rated businesses.

Of course, this strategy is not guaranteed to succeed. Growth stocks, for example, can rise to exceptionally high ratings that are difficult to justify based on previous averages or profitability. However, through buying an asset for less than its intrinsic value, it is possible to obtain relatively high returns in a long-term stock market rally.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

See The 5 Stocks

*Returns as of June 30th

More reading

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Forget gold. I’d follow these 3 steps to capitalise on a stock market rally appeared first on The Motley Fool Australia.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!