Wall Street has just rolled down the shutter on the worst August in 10 years with the major indexes down over 4%. But August was also the worst month since May last year, and that means the misery and fear we experienced in early August was nothing new – so we better get used to it, at least for a while.
To all long-term investors running their self-managed super fund, I counsel you this way: relax and go with the flow; in the long-term, the tide will rise and all good quality companies will go up with it.
But wait, there’s more – make sure you play the dividend companies in the meantime.
Whatever happens in the short-term, the market’s direction will be largely determined by decisions made in Europe regarding government debt and bank bail-out strategies. We can only hope that European Union officials lift their game.
The other big issue is whether the US will go into recession, and as I’ve made clear in recent weeks, I don’t think that will happen.
James Paulsen, who manages US$365 billion in assets at Wells Capital Management, is also in the anti-recession camp. Paulsen says he’s optimistic about the US economic outlook for the second half of this year and he argues that the August sell-off was excessive.
“I think we’re going to grow 3% in the second half,” he told CNBC. “We’ll take four or five weeks before people calm down.”
Paulsen’s just one of many optimists out there. Goldman Sachs’s Abby Joseph Cohen, who has been a big call merchant, is also in the optimists’ camp on shares for the end of the year. And on my SWITZER program on the Sky Business channel, Rudi Filapek-Vandyke of FN Arena showed a chart of the Dow Jones since 1930, which showed that markets go up rapidly for a long time and then go sideways for a long time (you can watch the video here on our Switzer TV page).
Sideways periods have run from between 1930-42 as well as 1963-87, and we’re in one now that started around 2000. Given the debt and fiscal policy issues in Europe and the US, it will be a couple of years until we break out to a new long boom or bull market, but it will come.
Obviously, the real money-making strategy in a sideways market situation is to sell at the top and buy the dips, but this is easier said than done. Also, history shows that spending time in the market is better than timing the market because we can simply make too many mistakes.
Mind you, I’d add that it’s also important that you do the right things while you are spending time in the market, and I have a few recommendations.
I believe that when the market is going sideways with a whole series of ups and downs – with many being quite significant, but still taking the overall index nowhere – it’s crucial to have a good investment strategy.
Filapek-Vandyke agrees with me, arguing that playing dividend stocks is the best way to offset the sideways direction of the overall index.
My preference is to hold about 20 stocks in my portfolio, which means I only have a 5% exposure to any one company. I also like to have a big exposure to good dividend payers, and given that around 50% of the stock market returns come from dividends, this is the best holding play while waiting for a long boom to develop.
The next boom will be driven by India, China and the internet. New business models that will emerge out of this groundbreaking technology will then drive company values up – and then the stock markets will finally head in the direction we like.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in today’s Switzer Super Report
- Charlie Aitken: My no.1 stock pickings to survive the “new normal”
- Ron Bewley: What not to buy – Part 2: sectors
- Tony Negline: What happens to SMSF assets in a divorce?