It’s beginning to look like we’re on the cusp of a new bull market. The TSX Composite Index is up 11.3% from its 2022 lows, and the major U.S. indexes are up even more than that. The momentum from this point onward may be slower, as stocks have already staged an impressive rally in 2023. Nevertheless, the potential for a new bull market is there.
The question is, what do you do to take advantage of such a bull market should it materialize?
It’s not obvious that you should buy the stocks that performed the best recently. It is future results, not past results, that determine how much money you make — many investors forget this. At the beginning of the year, technology stocks led the charge in gains, but that could change in the second half of the year.
In this article, I will explore three principles for taking advantage of the next bull market, starting with saving strategies and then moving on to stock selection.
Principle #1: Save money
The first thing you need to do to take advantage of the next bull market is to save money. You need money to invest. If you have plans of borrowing money to invest, I’d counsel against that: investing with borrowed money is very risky. The hedge fund Long Term Capital Asset Management collapsed by doing that, despite being run by Nobel Prize winning economists. If the professionals frequently go broke buying on margin, then you as an individual investor probably shouldn’t do it.
Principle #2: Look for what’s unfairly beaten down
The second principle for buying into future bull markets is to look at what has been unfairly beaten down.
One category of stocks you might want to consider is bank stocks. Royal Bank of Canada (TSX:RY) got beaten down in the March bank stock selloff, falling 5.7% from March 8 to March 31. Many bank stocks looked risky last month, as U.S. bank Silicon Valley Bank failed, as did a few others.
However, if you look closely, there’s reason to think that Royal Bank of Canada will be immune to much of what happened in the United States. First off, Canadian banks are under much stricter regulations than U.S. banks: they aren’t allowed to hold large amounts of low-quality assets like U.S. banks are. Second, Canadian banks generally have conservative lending standards, which keeps them safe in times of stress. Canada hasn’t seen a serious banking crisis in 150 years — I’d expect Royal Bank to bounce back when people realize that.
Another category of stocks you might want to consider is energy stocks. Many oil stocks like Suncor Energy (TSX:SU) have been falling in price since June 2022. These stocks peaked last summer, because oil prices hit a decade-high at that time.
Today, oil prices are lower, but the thing you have to remember is that oil companies like Suncor paid off a lot of debt last year. They may have surprisingly high profits this year, even with the relatively “modest” oil prices we’re seeing now. If they do, then they’ll prove to be good buys.
Principle #3: Dollar cost average
A final principle for buying into a bull market is to dollar cost average, rather than buying in all at once. Buying all of your stocks at one time is risky, because you may time the buy badly. If you spread the buys out over a long period of time, you’ll get many different prices. Eventually, you’ll get some buys in right near the start of a new bull market and likely make money.
