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Investment strategies for rangebound markets, part 2

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?

Equity risk

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 is rewarded.




Generic Mutual Fund Disclaimer

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.