How to invest when markets go sideways

Sometimes markets don’t go up or down, they go sideways. Here’s how to invest when markets are treading water.

Markets simply don’t go up in a straight line. They tend to overshoot and then flatline rather than go up at a constant rate. Think of markets like a coil, constantly being compressed before springing back to life.

As time passes and markets don’t go anywhere, it can be tempting to change your investment strategy or switch into cash. The best investors resist the urge to change strategy because they understand the secret to sideways markets.

As you can see, the general trend for Australian shares since 1992 has been upwards however there have been stretches of time when shares have gone nowhere. From 1999 to 2002 markets were flat. Then between 2003-2007 the market more than doubled.

Since 2007 shares have been playing catch-up for a decade – Australian shares had to wait 140 months (July 2019) to reach their previous high.

Markets rarely return to their long run average for any extended period of time. Instead they tend to overshoot to both the upside and the downside. We’ve written about this before in ‘How reliable is past performance?’.

How to invest during sideways markets

Our advice for investing when markets are going is no different to when markets are rising. Focus on investing into a broad range of different assets, rebalance periodically (or let Stockspot do it for you), keep your costs low and avoid the temptation to get in and out based on market commentary.

Here are some other factors to keep in mind when markets have no short term trend in the share market:

Don’t forget dividends

Dividends can make up most of your returns in sideways markets, so don’t forget them. Over the past 4 months to October 2019, the Stockspot Topaz portfolio has generated dividends of 1.85% and capital returns of 1.49%.

Dividends have therefore accounted for 56% of the total return over this period.

Diversification helps

Think outside of Australia. During the 2010-15 period that saw poor returns for Australian shares, other developed market shares in the US, Japan and Germany were up over 80%.

This is why 30% to 55% of the Stockspot portfolio growth assets are invested outside of Australia.

In the short-term, diversification can leave you disappointed with some parts of your portfolio which inevitably rise slower than others. However you won’t be disappointed with your portfolio over the long-term!

Rebalancing and re-investing dividends

In periods of sideways markets, the best way to buy low, sell high and keep your risk level consistent is through rebalancing. This is something we’re continually managing for clients.

Remember, sideways markets can be a friend in disguise if you are still in the accumulation phase of your life. You can buy stocks at lower prices rather than constantly buying higher and higher as markets rise.

For example, here are 2 different markets over a 5 year period. Both start and end at the same point. Which would you rather have invested in if you were periodically topping up your portfolio over the entire period?

Market A may look more appealing at first glance due to its steady gains, but in fact market B would have given you better returns.

Dollar cost averaging is the reason market B yields the best results because you were able to buy more at lower prices while the market was going sideways.

That’s the secret to sideways markets! It lets you Dollar Cost Average cheaper.

Avoid the noise – don’t let market commentary send you off track

Finally, don’t allow market commentators to influence your investing when markets are going nowhere. They’ll still come up with scary sounding headlines, which you can ignore. Stick to your process, avoid the noise.

Sideways markets are great for long term accumulators. They’re not great for ‘market experts’ trying to call a short term trend. That’s why they tend to exaggerate any move that does happen, no matter how small.

Markets might go sideways but you can stay ahead

Sideways markets can be frustrating to wait through, but the secret is to maintain your investment process even if you don’t see returns for months in a row. Patient investors who stick to their process and ignore the noise are the ones who will be rewarded over the long run.

Founder and CEO

Chris has been vocal in calling out the industry 'Fat Cats' and is known for telling it as it is. He sits on two Advisory Committees for the industry regulator ASIC, and was previously a fund manager at UBS. He holds a Bachelor of Commerce (Accounting/Finance Co-op Scholarship) from UNSW.

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