Should you buy stocks now before they soar in 2021? Or should you sell everything you own before the imminent crash? This is the question everyone's asking, and I wish I could answer, if only my local crystal ball dealership was still open.
Heading into the new year, investors can't make prescient portfolio moves since the future is unknown. But they can make smart moves. And I believe the smartest move investors can make in 2021 is to buy more stocks than they sell. Here's why.
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The case for buying stocks
Fortunately with the stock market, we have over 100 years of useful statistics to pull from, lending confidence to any long-term observation. And there are two stats I believe all investors should know by heart.
First, stocks go up most of the time. Over the past 100 years, the market has risen approximately two out of every three years. Put another way, if you bet stocks will go up in 2021, the data says you have a 66% chance of being right.
Second, when stocks go down, it doesn't typically last for very long. According to The Associated Press, since World War II, the average bear market lasts an average of 14 months. The average market correction lasts just five months. So even if 2021 proves to be the rare off year for stocks, there's still a good chance things will be trending in the right direction for at least some of the year.
Because of these two stats, I hope all investors plan to buy stocks in 2021.
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Plan to systematically deploy cash
Statistics say stocks will likely rise in 2021. But that doesn't necessarily mean investors should deploy all available cash right now. These aforementioned statistics also suggest that there are often opportune moments to buy top stocks, and having cash on hand is a great way to take advantage of it.
Consider Amazon (AMZN +0.27%) in 2020. The company's runaway success this year is due to growth in the e-commerce and cloud industries because of the pandemic. The stock is up an impressive 72% year to date, meaning before the crash was a great time to buy. But in March, the stock was down over 20% from 52-week highs -- an even better entry point for the opportunistic.
The timing of opportunities like this is unpredictable, however, and stocks can appreciate a lot while investors wait for a dip. Consider Roku (ROKU +0.24%). The stock hit all-time highs in September on a series of good-news events. To summarize, the company's customers are streaming more than ever, and more media companies continue partnering with Roku to bring their product to its audience.
Perhaps some investors liked what was happening with Roku's business but wanted at least a 20% pullback before investing. The stock has nearly doubled since then. There have been three pullbacks of at least 10% along the way, but none have reached that sweet 20% drop.
The moral of these stories from Amazon and Roku is that investors should have cash to take advantage of drops, but they shouldn't only wait for pullbacks, or they'll risk missing significant upside. Therefore, a systematic approach is a good idea, investing at regularly scheduled intervals.
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When to sell
The smartest investors will be net buyers of stocks in 2021. But the term "net buyer" implies the need to occasionally sell some stocks. Knowing when to sell stocks is tricky, since our emotions like to cast their vote early and often. But thinking about the coming year, if you own any stocks vulnerable to a second set of lockdowns, high unemployment, or shifting consumer behavior, now might be a good time to sell.
This is part of the reason I just sold the stock that had been in my portfolio the longest: Texas Roadhouse (TXRH 1.16%). The stock recently hit all-time highs despite this past year being an all-time challenge. Through the first three quarters of 2020, sales are down 13% year over year and net income has plummeted 91%.
This isn't any fault of Texas Roadhouse. A casual-dining steak restaurant just isn't a great business to be in during a pandemic. I believed it was my most vulnerable holding if the coronavirus worsens in coming months. But moreover, this was a stock I held in a taxable account, and I had the opportunity to harvest gains this year. Furthermore, I planned to use the funds at some point in the next couple of years for personal reasons.
My fellow Motley Fool contributor Lawrence Rothman believes now may be a good time to buy Texas Roadhouse stock, so take my personal motivation for selling with a grain of salt. But broadly speaking, bear markets are simply part of the investing cycle. Therefore, it could be a good idea to sell your most susceptible stocks.
Hopefully, selling will be the exception rather than the rule. Because as we've seen, I believe buying stocks is the smartest move investors can make in 2021.
