Use Your Tax Refund to Ride the Market Pendulum

— -- Spring prompts people to think about tree blossoms, outdoor activities and tax refunds. The average personal tax refund in 2015 was $2,893, according to the IRS.

If you have high-interest credit card debt or student loans, using your refund to pay them down would probably be the best investment you could make, given the interest you’re paying on these debts. If you don’t have these, you might contribute this money to tax-deferred accounts, such as a 401(k) or an IRA, to reduce your taxable income—assuming you haven’t or don’t envision reaching the contribution limit for tax deferment.

The next option (aside from spending your refund, which brings no income down the road), is to invest it. This option might strike you as ill-timed if you’ve been watching the herky-jerky stock market this year with your mouth agape.

But the flip-side of this positive: Some sectors are so beaten down that these stocks can be purchased cheaply. That is, unless, like too many investors, you prefer to wait for the market to improve and then buy high. Instead, you can get in when these stocks are out of favor and ride the pendulum back into the zone of investor favorability. The sector pendulum almost always swings back; it’s just a question of when.

Sure, you could end up waiting a while, but the rewards can be substantial if you are patient. This investing common sense was put to use by many when the market, depressed from the financial crisis of 2008, came back strongly over the following five years. Those who lost money during this period didn’t act so sensibly. They lost money in the market meltdown, then sat fearfully on the sidelines for a while, buying high when they eventually got back in.

The wise and patient folks who profited from the meltdown-turned-bull market know that when shares of household-name companies plummet in price -- yet their fundamental investing propositions remain intact -- there’s money to be made. In most cases, investors who want to get in on this but aren’t comfortable picking stocks can buy a mutual fund or exchange-traded fund (ETF).

The widespread perception that the market has a chronic disease provides opportunities that savvy investors can exploit—if they’re willing to wait for good returns. (This shouldn’t be a problem for long-term investors, which is what most individuals should be). Here’s a sampler of beaten-down categories:

• Energy stocks

  Once a blue-chip staple, energy companies have become value stocks. A couple of years ago, this prospect would have been regarded as astonishing, given the reliability of large energy companies producing solid returns. Their prices have been pummeled—the S&P Energy Index is down 21 percent in the last year.