DOLLARS AND SENSE: Good returns in sideways markets

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By David Deacon

Have you been frustrated by the lack of growth of your investment portfolio over the past year, five years, decade?

The reason may have something to do with the fact that we are in the midst of what we refer to as a range bound or “sideways” stock market.

Sideways markets typically follow long-term secular bull markets and are characterized by large up and down cycles, but little to no growth, over a 15-20 year period. The rationale is that long-term bull markets tend to push stock prices to inflated valuations. It then takes many years of stocks treading water for the value of the underlying companies to grow enough to justify the lofty stock prices.

The 1944-1966 long-term secular bull market was followed by a sideways market from 1966-1982 which, in turn, was followed by a long-term secular bull market from 1982-2000. We have been in a sideways market since 2000.

In August 2000, the S&P/TSX Composite Index in Canada was 11,247. Today it is 12,251, a Compound Annual Growth Rate of a meager .7 per cent per year for 12 years. The S&P 500 in the U.S. has declined from 1517 in August 2000 to 1448 today, an annual return of negative .4 per cent each year. Based on today’s stock valuations and historical patterns, we may very well experience another three to six years of the same pattern.

Assuming that to be an accurate assumption, investors must consider changing their investment approach from passive to active. In other words, instead of a typical buy and hold strategy, a more productive approach has been one in which the investor accumulates equities during periods of market weakness when valuations are low, then reduces equities after cyclical upswings when valuations are high.

For investors with portfolios of $200,000 or higher, this can be done most effectively by way of direct holdings in stocks and bonds, with the help of an experienced portfolio manager. For smaller portfolios, mutual funds may be appropriate. However, a strict buy and sell philosophy must be established.

Like with most things in life, investment strategies need to be adjusted with the changing environment. Investors who do not may continue to be frustrated by the lack of growth of their nest eggs.

David Deacon is a portfolio manager with Raymond James Ltd. He has 30 years of experience as an investment advisor in Nova Scotia. The views of the author are not necessarily the views of Raymond James Ltd. This is for informational purposes only. While statistics and data are from sources considered reliable, accuracy cannot be guaranteed.

Organizations: TSX, SP 500, Raymond James Ltd.

Geographic location: Canada, U.S., Nova Scotia

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