Cautious Investing for the Long Term

From 14000 to 6500, the Dow experienced a very volatile bear market. With the rally we have seen and sustained, a scent of aggressiveness is in the air. How aggressive should we be to beat the market and pull up all the losses while at the same time being cautious toward a correction? There are different ways to go about this but I want to stress the fact that we can be aggressive while staying cautious.

The first thing we need to understand is that we can be aggressive without speculation. Buying stocks with a higher beta is way to be aggressive. The higher the beta, the higher the volatility. The stock will go up and down with the market. If we think the market is going up, why not buy a higher beta stock that will go up with it? Another way to be aggressive is buying stocks that got beat up in the recession but lead coming out of it. Examples of this are: financials, industrials, and consumer discretionaries. These stocks got hit in the recession but have been the leaders coming out of it.

Cautiousness is something we need to keep in mind. It makes sense to buy stocks for the long term right now. Over the next 2 years it will be financials, industrials, and consumer discretionaries that will reign. People will borrow money (financials) and spend that money (consumer discretionary). Industrials just move with the economy which will recover. Timeliness is something we need to be cautious about. We are seeing positive news one week and negative the next. For example, new home sales went up followed by a rise in foreclosures. Another example, discretionaries raised the outlook one week and the following week we found out they had a sales decline the previous month. What happens if we bought after the outlook? We would have been hit with the sales decline.

The thing to remember is that long term investing can combine the two. We can buy higher beta stocks for the long term. If we have a 2 year target, it does not necessarily matter what will happen in the next quarter. Sure, we need some positive outlook to reaffirm our long term commitment, but long term takes away the timeliness factor. We need to be cautious about what we want to get into long term, but at the heels of a bottom we do not necessarily have to buy all conservative stocks. You can be aggressive with higher betas and beaten up sectors while still being cautious with a long term approach. It is when everything is unfavorable that you become aggressive for the long term. Now looks like a perfect time to make cash money via the long term-higher betas-aggressive-cautious play.