|Investment strategies for rangebound markets,
Wednesday January 11, 2012
In a recent column I mentioned how stocks may be in what’s sometimes
called a “rangebound” market, where trading tends to stay within
a band, rather than breaking out in a sustained upside trend.
In this type of trading pattern, there will be periods where
we see sharp upward or downward movements. So how could investors
benefit from such a market pattern?
The best way, as always, is to have a well-diversified portfolio
and not to make too heavy a bet on equities if you are in pre-retirement
or, worse yet, already retired. Do not be 100% invested in equities
if you are within 10 years of retirement, unless a 30% haircut
is something you can handle without loss of sleep. Move to a
fixed income ratio of 20% to 50% depending on your risk tolerance
and time horizon. You will sleep much better without losing
a whole lot in terms of performance.
The fall of the American Empire
We are witnessing a paradigm shift as the world moves from
“West-centric” to “East-centric.” Major economic and political
shifts are happening now and will continue to occur as the torch
passes over the next 10 years. However, there are still great
U.S companies that do business worldwide (Wal-Mart Stores, McDonalds,
Microsoft, and Apple to name only a few) that will thrive despite
this shift, so buying U.S. stocks or U.S.-stock investment funds
can still be rewarding.
In addition, as the 2012 U.S. elections, including the Presidential
election nears, few new economic policies will be put forward,
although many new policy ideas will be floated. That means 18
months of U.S. economic status quo as far as markets are concerned.
Invest where the economies are growing
Emerging nations, including the big three – Brazil, India and
China – continue to show vigorous growth. But there are other
smaller nations that also show strong rates of growth while
Western nations stagnate or, in the case of Europe, contract.
Emerging markets and natural resources are great places to
take advantage of the shift to the East. Resources have been
performing very well, and I expect this trend to continue. With
the expansion in the East, there will simply be too great a
demand on our resources and prices will rise. Canada has a small
economy (2% to 3% of world GDP), and 80% of our stock market
is dominated by resources and financial companies. To increase
the potential for better returns with less volatility, it makes
sense to diversify outside those narrow sectors.
Buy the dips
During those dips, slides, and corrections in the market, add
a lump sum to your holdings while prices are depressed. That
way, you may be able to achieve an overall annual return of
as much as 8% to 10% despite a rangebound market trend. Remember
that historically, the tendency is for stock markets to move
higher over the longer term. Ultimately, equity investors’ patience
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Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read the
simplified prospectus before investing. Mutual funds are not
guaranteed and are not covered by the Canada Deposit Insurance
Corporation or by any other government deposit insurer. There can be
no assurances that the fund will be able to maintain its net asset
value per security at a constant amount or that the full amount of
your investment in the fund will be returned to you. Fund values
change frequently and past performance may not be repeated.
Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and is the
opinion of the writer. This information is not intended to provide
specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.