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Sound Advice: October 21, 2020

 Can You Make Money in a Flat Market?

 Yes, you can.  Although over many decades annual returns for the Standard & Poor’s 500 stocks have averaged about 10%, that includes gains and losses in some years that were a multiple of that rate.  So a target of about 10% might be reasonably achievable for a long-term investor, but the long term would mean at least three to five years and probably longer.  Given the relatively rich valuations that are currently prevailing, it seems entirely possible that returns in the single digits are more likely in the years just ahead.

Since 1926, the inception of the S&P 500, there have been more than a few years with plunges of better than 20% or 30%.  Let’s not forget 2001-2002, 2008-2009, and this past March.  Those were painful pullbacks that rattled all but the most steadfast investors.  That kind of volatility, however, is part of the program.  Standing fast in the face of roller-coaster markets is the price we pay for the potential rewards available.

With that understood, let's say the market moves sideways for an extended period.  Does that mean there will be no money to be made.  Given the current posture of the investment markets it certainly will be a daunting task to reap gains, but some progress can be made.

The most difficult part will be in the fixed-income market, i.e., bonds and other interest-bearing securities.  Interest rates are at historical lows and likely to remain so for several years, according to Fed Chairman Powell.  Those who cannot tolerate any risk will find extremely slim pickings.  Those who can abide occasional swings, however, will have some opportunities in lower-quality offerings.  Rather than chasing yield it would be better to view this asset class as shock absorbers for the bumps ahead.

The equity market is more promising.  There are always companies that grow more rapidly than average.  For the S&P 500 companies, a typical growth rate is about 7%.  Yet there are more than a few companies within that universe that are growing steadily in the low double digits.  It would not be unreasonable to expect that the prices of those companies' shares will reflect the underlying gains.  Add to that a dividend yield of 2% and you end up with an investment that's worth considering even if the overall environment is doing little better than marking time.

Some companies are above average and some are below average.  When you identify those with the best credentials, it's likely that you'll continue to move ahead even if most others are going nowhere fast. 

N. Russell Wayne, CFP®


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