As volumes dwindle and interest in the sharemarket gets progressively eroded by a market that doesn't trend the promise of "long term", growth is proving to be little more than an out-of-fashion, misplaced optimism that is costing people money.
HMAS Set & Forget sank in 2007, along with HMAS Patience. We can't be waiting for purist ideas about value being reflected in the share price if it's going to take 20 years. We can't afford to be blindly optimistic in a market that has fallen 9.6 per cent a year for five years, not until a reliable long-term trend returns. Until that day, until the tide starts to lift all boats again, including HMAS Buy & Hold, you have to ask, just what are we going to do in a bear market?
Thankfully, for those of us who have been there before, there is a well-worn pattern that involves the following steps. Stop losing money. Trade, don't invest. Focus on stocks, not "the market". Take profits more often (because they won't last) or sell and stand on the shore rather than ride it out on the stormy sea.
But not all of us want to stand on the shore. Not all of us want to be risk-free and as the rewards for being risk-free become less and less interesting, we need something else to do while we wait for the bottom.
Some of us want to take some risk, some of us want to try to make money. But the problem that constrains 90 per cent of us is that all we know is how to go long equities. But in a market that is falling, or ranging at best, the odds of picking a winner have gone from 85 per cent in the bull market (15 per cent of the S&P/ASX 200 went down in 2007) to 38 per cent in the current market (62 per cent of the S&P/ASX 200 went down in the past year). It is no longer easy to make money simply going long equities. So what else can we do?
The plain vanilla answer is learn to go short, something you can do through contracts for difference. But the truth is that most long-only investors would rather put their hand in a bucket of piranhas than open a leveraged derivatives account without really knowing what they are doing. Forex is another incarnation of CFDs but, quite honestly, what edge can you possibly have over the other millions of traders, many of whom do it all day with a lot more understanding? The other option is options, but liquidity has become an issue in a quiet market and even the plain vanilla call-writers over existing holdings are finding it tough to pick up a premium that matches the risk that they take.
Then there are listed investment companies - akin to managed funds - which come in a variety of flavours/specialities, the advantage of which is that they can be traded on the ASX like any other share.
And then there are exchange-traded funds and exchange-traded commodities and it's here you might find some amusement. There are now more than 60 ETFs and ETCs listed on the market and a number of ETF providers.
The issuers include BetaShares, which has just launched a Bear ETF, which allows you to buy an ETF and in effect short the S&P/ASX 200 in doing so. Other players include iShares, Vanguard, State Street SPDRs, EFT Securities and Russell Investments. See their websites to view their products. You will find you can trade in indices, individual ASX sectors, commodity price ETFs and currencies. And then there are a host of more imaginative ETFs designed to suit the times, including at least three high-income/high-dividend select funds, bond ETFs and there's even one that represents cash.
Some are conventional and some are synthetic. There are different risks with both. Liquidity is often an issue, although some are so highly traded there is no issue.
It's all on the ASX website. The good thing about ETFs is that they all trade in the same was as any other shares on the ASX. So you don't have to change anything just find out their codes and what they represent. It will make a change from waiting for a bull market. Not everything is on the equity cycle. Have fun.
Marcus Padley is a stockbroker with Patersons Securities and the author of sharemarket newsletter Marcus Today. His views do not necessarily reflect the views of Patersons.
Frequently Asked Questions about this Article…
Why is a 'set-and-forget' buy-and-hold strategy risky in the current market?
The article argues that when the sharemarket isn’t trending and growth expectations are fading, a pure buy-and-hold approach can cost you money. It notes recent extended weakness (the market fell about 9.6% a year for five years) and warns you can’t rely on waiting decades for value to be reflected in prices—so blindly holding winners may not work in a prolonged bear or flat market.
What practical steps should everyday investors take in a bear market?
The piece suggests a simple pattern: stop losing money, treat some positions like trades rather than investments, focus on individual stocks rather than the broad market, take profits more often because gains may be short-lived, or consider selling and waiting on the sidelines instead of riding out a stormy market.
Can retail investors short the market, and what are the common ways to do it?
Yes—one plain-vanilla option is learning to go short via contracts for difference (CFDs). The article also mentions forex (another form of CFDs) and options as alternatives, but cautions that leveraged derivatives and forex require expertise and that options liquidity can be poor in a quiet market.
What are listed investment companies and how do they differ from ETFs?
Listed investment companies are similar to managed funds but trade on the ASX like ordinary shares. They come in different specialties and can be a way to gain managed exposure without leaving the exchange-based market, whereas ETFs/ETCs typically track indices, sectors, commodities or other assets and trade like shares as well.
How can ETFs and ETCs help investors navigate a falling market?
The article highlights more than 60 ETFs and ETCs on the market, including products that let you short the S&P/ASX 200 (for example, a Bear ETF from BetaShares). ETFs let you trade indices, ASX sectors, commodity prices and currencies, and there are also high-income/dividend ETFs, bond ETFs and even an ETF that represents cash—so they offer alternative exposures outside the traditional equity cycle.
Who are the major ETF issuers mentioned and what products do they offer?
Issuers named in the article include BetaShares (which launched a Bear ETF to short the S&P/ASX 200), iShares, Vanguard, State Street SPDRs, EFT Securities and Russell Investments. Between them you’ll find index ETFs, sector ETFs, commodity and currency ETFs, income/dividend funds, bond ETFs and more.
Are there risks with different ETF structures and liquidity I should know about?
Yes. The article points out that some ETFs are conventional while others are synthetic, and each structure carries different risks. Liquidity can also be an issue in a quiet market—some ETFs are highly traded and have no liquidity issues, but others may be harder to trade at tight prices.
How do I buy or trade ETFs on the ASX and where can I find more information?
ETFs trade on the ASX the same way as any other share—find the ETF code and what it represents on the ASX website or the issuer’s site. The article recommends checking issuer websites (for example BetaShares, iShares, Vanguard, State Street SPDRs, EFT Securities and Russell Investments) to view specific products and details.
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