The U.S. and Canadian markets are near their highs. As a result, investors may be reluctant to invest in the market. If you invest in individual stocks, whether the markets make new highs or not is irrelevant.
You should be more concerned about how your stocks are doing and if they are making new highs. If they are, determine if they’re supported by growing earnings or cash flows. When businesses become more profitable, it’s natural for their share prices to head higher.
Winning stocks will reach a high today and be higher tomorrow.
That’s why investors should let their winners run. In other words, buy, hold, and monitor quality stocks.
Let your winners run
If you hold quality stocks, including Toronto-Dominion Bank (TSX:TD)(NYSE:TD) or stable utilities, such as Canadian Utilities Limited (TSX:CU), there’s no reason to sell them when the underlying businesses are doing fine and you’re receiving a nice income from them.
Some investors trade in and out of stocks, aiming to book profits at the highs and buy back at the lows. In theory, it sounds like a good plan, but in reality, it’s difficult to do.
We can neither control stock prices nor know for sure which way they will go next. It’s true that when the market crashes (and we know eventually it will), we can buy businesses at big bargains. But we don’t know when the market will crash.
So, in order to not miss the upside of the market, investors are better off buying quality businesses at good valuations and holding them as long as they continue to deliver. TD and Canadian Utilities continue to increase their profitability and dividends over time.
What about new money?
Should you invest new money in today’s markets?
I don’t see why you shouldn’t if you can find quality companies that meet your financial goals.
For example, your goal may be to earn a long-term rate of return of 8%, inclusive of a minimum 3% yield. In that case, Enbridge Inc. (TSX:ENB)(NYSE:ENB) fits your bill.
The leading energy infrastructure company is fairly valued, offers a 4.2% yield, and aims to increase its dividend by 10-12% on average per year through 2024. This translates to an estimated rate of return of 14-16%, which gives plenty of buffer for the goal of 8%.
Investor takeaway
Since it’s difficult to trade in and out of stocks, long-term investors are probably better off letting their winners run once they’ve bought them at good valuations. After all, stocks that become more profitable over time will eventually make higher highs.
Since markets are near their highs, it’s logical that there are fewer bargains available. So, you may hold more cash than usual while you wait for your desired stocks to be priced attractively enough for you to buy.
That said, if you find quality stocks that can deliver your target rate of return or yield requirement, you can still invest in them as cash returns very little in terms of interest income.
