My top 4 tips for making the most of a stock market recovery

Jon Smith runs through his thoughts on how he’s planning to take advantage of a potential stock market recovery.

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The FTSE 100 is several hundred points away from the highs of the year above 7,600 points. Some think that we’re heading towards a stock market recovery. Now that investors are aware of the risks relating to rising interest rates and high inflation, the surprise fear factor has gone. If we do see a bumper recovery in the second half of the year, here’s how I’m going to try to make the most of it.

Target both growth and value

My focus for investing my fresh money would be partly on top growth stocks and partly on undervalued shares. Growth stocks tend to be the best performers during a period when the stock market rises. This is because the sectors operated in tend to be those that have the highest demand. So if the economy is performing well to lift the market in general, the largest demand from consumers should come in the growth stock segments.

Value is another area I’m dialled into. Given the volatility this year in shares, some companies have experienced steep falls in their respective share prices. Even established names such as JD Sports Fashion, Ocado Group and Associated British Foods are down at least 30% over the past year.

So if I see signs that the stock market is starting to move back higher, I think some of the heavily discounted stocks (like those mentioned above) could be a smart buy for my portfolio.

Being patient and not gullible

I’m going to be patient and split up my money for investment over a period of time. The stock market is still very fragile and even a recovery could be derailed quickly by fresh negative headlines. To avoid going all-in only to experience a subsequent market crash, I’m going to invest in chunks.

If the market does keep rising, I’ll be able to buy on the way up. Sure, I’ll lose out a little from not buying earlier. But I think it’s a much better way to manage my risk overall. I’d rather give up a few percent of profit in order to protect myself against, perhaps, a 20% loss from being greedy and impatient.

Another tip I’m going to make use of is to avoid high-risk ideas. During previous market rallies, some get-rich-quick stock ideas always pop up on the internet. Given that the broader market is recovering, people tend to get over-excited about the bear market potentially being over and fall into the trap of investing without careful analysis. I’m not saying that these are all scams, but the possibility of making insane returns in a matter of days is always going to be unlikely.

Taking advantage of a stock market recovery

It’s impossible for me to say with certainty at the moment if we’re approaching a recovery. But I think that we’ll get more direction in the next month that will make it clear how the second half of the year will play out.

If it’s clear that the market wants to head higher, then I’m keen to take advantage. After all, over the long term, the trend is my friend.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Associated British Foods and Ocado Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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