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Growth Strategies for a Flat Market

Last update on: Jun 18 2020
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Have you earned 0% or even lost money on your investments over the last five years? Most investors aren’t as fortunate as we have been. The major stock indexes are about where they were five years ago. Anyone who follows the conventional buy-and-hold index investing strategy has no net gains or modest losses to show for the last five years. Investors who opted for “growth” stocks still have significantly negative returns.

I’ve long maintained that an investor’s worst nightmare is not a bear market. It is what I started warning about around 1998 and what we likely are in now – a long-term flat or sideways market.

This type of market requires different strategies. The first essential strategy is an increased emphasis on value and a margin of safety. A bull market can cover up a lot of mistakes and reward excess risk. That’s not true of a flat market.

Also, stock mutual funds should be focused and run by managers with proven stock selection skill. The flat indexes disguise the increases and decreases of thousands of stock prices. Many stocks will be winners in the market, and a good stock picker can find some of them.

Following the market indexes is a road to nowhere. Simply buying and holding stocks and funds won’t be fruitful. The long-term sideways market will have many highs and lows. These mini-bull and -bear markets last a few months to a couple of years. Gains can be enhanced by investing after declines and selling after earning some gains.

Finally, seek diversification. Stocks are not the only investment available, and usually are not likely to be the highest-returning investment during their flat periods. Seek gains from investments other than stocks and stock indexes. We have done that with real estate investment trusts, international bonds, and other investments.

These are the principles we have used for years to earn solid returns with low risk. They are showing their real value in the tough markets of the 2000s. Now, let’s take a look at our portfolios.

Sector and Balanced Managed Portfolios

Cohen & Steers Realty Shares came close to our new sell signal in late September, but rocketed from there. It remains our top-performing fund, and I am readjusting the sell signal to preserve our gains.

Torray Fund and Oakmark Fund did not have good starts after our recommendation in last month’s visit. They are trending down with the market indexes, though not as far down as the indexes. They are at-risk of falling through the sell signals set in October’s issue.

I re-evaluated the funds and still like these investments. As I said earlier, I am optimistic about the economy and believe such skilled stock pickers will do well for us. Therefore, I am re-setting the sell signals to give us a little more room on the downside before a sale is forced.

Dodge & Cox International has declined a bit but is safely above its sell signal. Tocqueville International Value also declined shortly after our recommendation. It has no sell signal. We expected volatility from the fund in the short-term. Each fund remains in the portfolios.

Driehaus Emerging Markets Growth also declined a bit, but did not approach its sell signal. This fund should do well as global economies grow. It also will benefit from rising commodity prices, because many emerging market economies have strong commodity foundations.

The dollar took another tumble recently, and that spurred another boost in American Century International Bond. The fund is comfortably above its sell signal and is reaching toward our maximum purchase price. We expect the dollar to decline in a stair-step pattern over the next few years, so don’t chase the fund. If you missed the opportunity to purchase at lower prices, you probably will get another chance in time.

Hussman Strategic Growth continues with its fully-invested portfolio that is hedged against overall market declines. It rises modestly when the indexes rise and declines modestly when the indexes fall. The fund managers continue to believe stocks generally are overvalued and that the market trends are not favorable. We’ll maintain the fund as the anchor for these portfolios.

Income and Income Growth Portfolios

Vanguard Short-Term Investment Grade (previously known as Short-Term Corporate Bond) rises modestly when interest rates fall, and declines a little when rates rise. It is our safe-haven in this period of volatile interest rates and offers a yield of about 2.99%. We’ll keep the bulk of these portfolios invested in this fairly stable fund until it appears that interest rates have reached a cyclical peak.

Over the next six months, we are likely to see the rate on 10-year treasuries fluctuate from 4% to 5%. With rates near the low level of that range, we want to avoid bonds that are more risky than short-term bonds.

In the meantime, we’ve had strong returns from Cohen & Steers Realty Shares. This more than offsets a modest loss in Dodge & Cox Balanced fund. DODBX’s stocks declined while its bond portfolio appreciated. Since it is 60% in stocks, the result since last month is a small net loss.
I have adjusted the sell price on CSRSX and recommend holding both funds.

In these portfolios we’ve seen how our investment principles work. Strong returns from funds such as Cohen & Steers Realty Shares and American Century International Bond offset losses and weak returns from other funds. November 2004.

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