When the stock market is at roughly the same level now that it was six months ago, that means the market has gone sideways, rather than forwards or backwards. A sideways market creates special challenges for investors, requiring distinct strategies for dealing with those challenges.
Challenges of investing in a sideways stock market
A sideways stock market is especially troublesome because low interest rates and bond yields leave investors fewer alternatives in their search for returns. It is widely believed that low rates have chased more investors into the stock market in recent years, but now that bank rates have been low for a long time, that added demand may have plateaued.
Of course, six months with little or no stock market return is not the end of the world, but this performance level could go on for months or even years longer. From an investor's standpoint, having prices level off is not as neutral a development as the term "breaking even" would imply. Having stock prices go nowhere means steadily losing ground to inflation. It also means lost time towards growing investments to fund retirement or other long-term goals.
5 investment strategies for a sideways stock market
When the stock market is rising steadily, a broad-based and passive approach like indexing can be sufficient to earn decent returns. However, when the tide is not rising fast enough to float all boats, it can take a more active and selective approach to eke out a respectable return.
Here are five strategies to consider during a sideways stock market:
1. Sector rotation
The stock market represents a diverse collection of industries, and each sector is sensitive to different economic influences and investor outlooks. As a result, performance varies by sector, and you can benefit from those variations. This does not just mean that you can boost your return by favoring some sectors over others. As individual sectors cycle up and down, it creates more opportunities to buy low and sell high than you might expect during a sideways market.
2. Determine pricing opportunities
Even in a sideways market, individual stocks have rising and falling periods. If you have strict disciplines about buying and selling at certain valuations, you have an opportunity to get in and out of individual stocks as they fluctuate in price. In other words, there is little money to be made in a sideways market with a buy and hold approach, but with active buying and selling, you can take advantage of individual pricing opportunities.
3. Look for dividend yield
If stock prices are not going anywhere for a while, it helps if you can be earning some dividend income while you are waiting. The majority of the stocks in the S&P 500 pay dividends, but the amounts vary greatly. Despite these differences, with savings account rates near zero and bond yields less than 2 percent, a higher percentage return would still be pretty attractive.
4. Consider foreign investments
If the U.S. market is stagnant, one possible solution is to look at foreign markets for opportunities. The U.S. economy is considered healthier than the economies of other major developed nations, so investing overseas may be a bumpy ride. Still, sometimes it takes turmoil to create opportunity.
5. Squeeze more out of deposit accounts
When stocks are earning double-digit returns, interest on savings accounts can be almost an afterthought. However, with returns everywhere hard to come by, attention to all details is essential. Do some comparison shopping to make sure you are getting competitive rates on your deposit accounts.
As investors face a sideways stock market and with interest rates starting out from extraordinarily low levels, it is easy to envision an environment where the investment benefits of economic growth are neutralized by rising rates for a couple years as rates return to more normal levels. In that case, you might want to try a more active approach to seeking returns.
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