sideways market

In this article, we will discuss the concept of sideways markets and how to survive them if you ever find yourself in the middle of one.

What is a sideways market?

A sideways market is one that has several peaks and troughs and fluctuates quite a bit, but at the end of the day goes nowhere.

What triggers a sideways market?

Human emotions are what cause sideways markets to form. The historic market trend has been that sideways markets often follow secular bull periods. Stock valuations tend to become very high towards the conclusion of secular bull markets.

What to do to get through a sideways market?

In the event of a sideways market, here are some investment principles to help you get through it.

  1. Boost the safety margin. The goal of value investing is to avoid overestimating profits by purchasing stocks at a discount. With the price-earnings ratio continuously falling, that margin has to be boosted even further.
  2. Diversify your investments and go worldwide. A wider range of potential investments increases the opportunity cost a new stock must satisfy to gain entrance to your portfolio.
  3. Don’t sit on your hands as an inactive value investor. A secular bull market that lasts for decades is still far away, and traditional buy-and-hold investment is in a slumber. It will be a long time before we see traditional buy-and-forget-to-sell investing come back to life. It’s time to up our sell discipline game.
  4. Despite being appealing, market timing is tough to accomplish. Therefore, look for value in individual equities, purchasing when they are inexpensive and selling when they have achieved a reasonable price.
  5. Never succumb to the temptation of evaluating things on a relative basis. A substantial portion of equities will seem inexpensive on the basis of historical values, but previous bull market valuations will not be relevant for an extended period of time.
  6. During secular bull markets, investors have learned that there is a very high opportunity cost for holding cash, therefore it’s best that you also do not keep it on hand. When markets are sideways, cash loses out to other assets such as stocks and real estate, making the opportunity cost a lesser consideration. You’ll be compelled to own stocks that aren’t outstanding or ones that you see as being undervalued if you buy in good faith and remain fully invested.

So there you have it –  As long as you follow the above-mentioned principles, you’ll not just be able to survive a sideways market but also make decent profits.

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By Jamie Redman, August 6, 2022
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