Ask Colin

In history, last time Dow Jones average spent 16 years (1965 - 1982) going side way after 23 years of bull market (1942 - 1965). Now, the Dow has just finished a 19 year long bull market (1982 - 2001). If we knew it will spend more than 10 years going side way or going down, would you suggest we should stay away from the market, or have very low exposure to it? Because compounding is essential for accumulating wealth in long term, I just thought 10 year will be a long time in ones life.

I am glad you asked this question, because I have strong view about it.

Firstly, the 1965 -82 period was a sideways market. However, there was also a 40% decline in the middle of it. There was also a fairly wild electronics boom in it as well in the 1970s. So, there were risks and opportunities. You really need to take a shorter term view as a trader.

Secondly, if you take the "real" (adjusted for inflation) picture, it was not a sideways market, but a big bear market. Wealth was slaughtered in this period.

Thirdly, just looking at indexes is very dangerous. Individual stocks move a lot more than the index - in both directions.

So, I think that a trader needs to keep trading the market. Traders should keep moving in and out on bull and bear trends. Traders should also keep moving out of weak stocks into strong stocks.

Investing is, of course a different matter.

My strategy as a trader is to stay out of bear markets and trade the bull markets. However, there is scope to have some exposure at any time to strongly trending stocks.

It is especially important to be exposed to stocks if you have a long term investment horizon. Stocks have the best long term return of any asset class.

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