Strategies for a Sideways Market

Reuters ^ | Sunday August 15, 1:10 pm ET | Linda Stern

[BenLurkin]

WASHINGTON (Reuters) - The bulls and the bears are in this together, scratching their heads and wondering what's going to happen next. Up and down, down and up. As soon as you think you know where the stock market is going, it doesn't.

So far this year, the U.S. market has been lackluster, or what James Paulsen, chief investment strategist for Wells Capital Management, calls "trendless."

"Frustration has dominated because nearly everyone has been wrong. Or at least not right," Paulsen wrote in his last analysis.

The reasons for this are mainly guessable: The job-challenged recovery, the terror threat, rising oil prices and the uncertainty of a too-close-to-call election all contribute to market drift.

But there's another factor at play that's disturbing: An increasing amount of money has been flowing into fast-trading (and often short-selling) hedge funds that may be whipsawing the market with their staccato trading patterns.

"Part of the reason for these sharp swings within a narrow trading band is the dominant participation in trading by the burgeoning hedge fund community," said Liz Ann Sonders, chief investment strategist for Charles Schwab in New York.

"Current estimates suggest that upwards of 70 percent of the volume of trading on the New York Stock Exchange is program trading ... (the kind of) ... short-term trading typically performed by hedge funds," she said.

What's a small-time investor to do?

Perhaps it sounds facile, but the best thing to do with a sideways trending market is "not much."

Plain folk who are stashing away money for college, retirement, or that rainy day don't have the computer models that those hedge fund managers are using. Nor do they have the deep pockets to carry them through should their models fail.

But they do have one thing going for them: The upward trend of the U.S. stock market. Most investors who stick with their long-term program of regularly investing in a diversified portfolio will be richer in five years regardless of where the market goes on Tuesday ... or Wednesday ... or Thursday.

"If you could guarantee success, the best advice would be to trade this thing like crazy," said Sonders. "But even the pros have trouble."

Her advice is to stick with a long-term program and not worry about the ups and downs of 2004. The very long-term trend in the market is up, and even the most conservative investors get to participate in most of the gain, according to research from her firm.

Between 1970 through 2003, conservative buy-and-hold investors gained 9 percent a year, while the most out-there, fast trading, chance-taking aggressive investors earned 11 percent a year. It's better, she suggests, to shoot for that 9 percent return and sleep well at night. How do you do that in this zig-zaggy market? Here are a few strategies:

-- Dollar cost average. This is an old, but tried-and-true technique. Pick a low-fee generic stock mutual fund, such as a broad index fund, and deposit a set amount in it every month.

If it's been a bad month, you'll buy more shares at lower prices. If it's been a good month, you'll limit the number of shares you buy at higher prices. Over years, you'll accumulate reasonably priced shares, make money and not waste time trying to time the market.

-- Look for value. With earnings up and share prices down or flat, that's getting a little bit easier to do. If you buy shares of companies that are trading at about 16 times their earnings or less (the current market average, says Paulsen), you'll probably be buying companies that can withstand the dips and be better positioned for the upswings than the overpriced, overbought Wall Street stars.

Look, too, for companies that have a so-called "PEG" ratio -- which is a company's price earnings ratio divided by its annual earnings growth rate -- at or below 1.

-- Continue to rebalance. Bonds way up, stocks down? Send a little bit more to the stock fund and a little bit less to the bond fund until you're back at the mix you think is best. If you bet wrong, it's not a big deal; you're still diversified.

But over time, a once-a-year rebalancing will protect you from the portfolio-killing mistakes investors sometimes make when they are bored or frustrated and want to shake things up.

The market will shake itself soon enough. And those slow-steady investors will be ready when it does.

(Linda Stern is a freelance writer who covers personal finance issues for Reuters. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern@aol.com.)

[SeattleNeedsHelp]

Same "Buy and Hope" crap the financial pornographers have been touting since the market peaked in 2000. Maybe Linda should recommend some strategies that work in a secular bear market. Yea, stocks always go up if you hold them long enough - tell that to the people who held stocks during through the 60's and 70's.