How To Invest When The Market’s Going Nowhere
When was the last time you reviewed the performance of your portfolio?
No doubt you’ve had a look at it over the past few years.
And the one thing that may have struck you is lacklustre performance.
While it’s had its ups and downs, for the past three years the market has been trending sideways.
In fact, quite recently we were back to levels we last saw in 2014!
So, what can you do when the market is behaving like this?
Let’s take a closer look…
Dealing With A Sideways Market
Take a look at the chart below…
This chart shows the performance of the JSE Top 40 Index over the past three years.
There isn’t a long-term trend in sight.
Yes, there have been large swings up and down, but this volatility brings with it swinging gains and losses to your portfolio.
Whilst investing for the long-term is your best bet, you can’t help wonder, and worry, about what’s happening to your investments.
So how can you gear your portfolio up to cope with a sideways market?
Here are six top strategies to get you through it…
6 Ways The Pro’s Deal With A Sideways Market
Sideways Strategy #1: Focus On Dividends
A solid, long-term portfolio deserves to have a reasonable weighting of solid dividend paying companies.
These companies tend to be leaders in their industries. And, in many cases, in sectors that continue to perform regardless of what the market is doing.
While the market may be up one minute and down the next, these solid stocks should continue to pay you dividends.
As long as you continue to receive dividends, you can ignore what’s happening in the shorter-term with share prices.
Savvy investors will look to top up their holdings of these solid companies when prices dip in a sideways trending market.
For example, you can use your dividend income to buy more shares.
Sideways Strategy #2: Think Long-Term
A market going nowhere is also the perfect time to don your economist hat.
You need to think about the long-term.
Look at the driving forces in the economy and which sectors look the most promising to invest.
For instance, you may think that IT and related sectors are going to boom as technology continues to evolve at a rapid rate.
If this is the case, ensure that you have exposure to this in your portfolio.
Again, take advantage of dips in share prices of solid, growing companies in the IT arena.
Careful stock picking in this type of market should pay off handsomely over the long run.
Sideways Strategy #3: Have A Portfolio Tidy Up
If it’s been a while since you’ve cleared out the laggards in your portfolio or rebalanced, now is the time to do it.
By selling off stocks that haven’t performed as you thought they would, you’ll also free up some cash you have locked into your portfolio.
This cash will act as a buffer, reducing the overall volatility in your portfolio.
Plus, it also gives you the chance to stock up when great buying opportunities present themselves.
For stocks that you’re desperate to own, but think are too expensive, make sure you add them to your shopping list.
Decide what price you’d be happy to buy at and wait.
Sideways markets can throw up lots of buying opportunities for the patient long-term investor.
Sideways Strategy #4: Rand Cost Averaging
If your goal is to continue to grow your portfolio, it’s a good idea to spread out your investments.
This means that changing prices will have less of an impact on your portfolio.
This is rand cost averaging, a technique that involves you spending the same rand value regularly on a particular investment.
When prices are higher, you’ll buy less shares. When prices are lower, you’ll buy more shares.
You can also use this technique for buying into exchange traded funds (ETFs).
Rand cost averaging should benefit you buying into quality companies over the long-term regardless of what the market is doing.
By spreading out your investment, overall you should pay a lower average price per share.
The important thing is to invest in the stocks with the best future potential.
Sideways Strategy #5: Consider Something A Bit Riskier
As the market tends to bounce around in a sideways market, it may be worth gearing up.
This strategy is only for disciplined investors who have a healthy appetite for risk.
You could consider using geared instruments, such as single stock futures or contracts for difference (CFDs) to play the zig-zag moves the market makes.
This strategy involves trying to capitalise on very short-term trends in the market, riding them up or down.
Whilst this strategy has the potential to yield some short-term gains, there is also the very real risk of losses.
You must apply strict risk management techniques to protect yourself.
This strategy has the potential for you to hedge your portfolio against downside risk.
Sideways Strategy #6: Focus On The Fundamentals
Just as in upward trending and downward trending markets, don’t try to time a sideways market.
You’ll never know until after the event when a sideways market is over and a new trend is in place.
The most important thing is to focus on the fundamentals of individual companies you analyse.
If your analysis shows that they are great businesses with fantastic long-term prospects, invest.
Yes, you can afford some patience for pullback in prices, but you’re never going to time the lows, or the highs for that matter.
Why A Sideways Market Secretly Hides Great Opportunities
While a market going nowhere can dishearten you, don’t let it make you lose focus of your long-term investment goals.
As I’ve shown, a sideways market actually presents you with some great opportunities.
Make sure you take advantage of depressed prices.
This could be picking up additional great dividend payers or adding new stocks to your portfolio.
And ensure that you still periodically review your portfolio and investment goals.
As history shows us, sideways markets don’t continue forever.
At some stage, the market will resume its upwards trend.
Until then, here’s to profitable investing.
The Money Lab