Get rich slow, or try the short term and get poor quick

FOLLOWING a nasty correction, which kicked off in May, money is flowing back into the stock market. This is very welcome; it's been a rough ride since then.

Money flowed out of the equity markets, because vast amounts of cash have been moved around the globe as the euro has been repriced and huge investment funds have been repositioning for the Chinese RMB US dollar realignment.

The equities market is junior to bonds and currency, and major action in either of the senior markets overwhelms short-term fundamentals in stocks and shares. Consequentially, trading equities can end up being the same as trading the pound or dollar, or some such other volatility foreign exchange situation. Bonds and currency markets can turn stocks into nothing but a proxy for what is going on in their sphere.

Markets are bound together because financial instruments end up being proxies for each other and markets try to even their values out. It doesn't matter that the instrument might represent a commodity, a currency or a stake in a telecom such as Vodafone. They are all bound together. However big moves in the big instruments are what drive the day-to-day action in the market as a whole.

Eventually this forced lock-step breaks down as small differences in the short-term open up big differences in the long run.

In time it all pans out for the sensible investor who ends up less affected than the short-term speculator who risks being squashed by short-term moves in markets which at first glance seem unconnected to their trading. Why should a Greek bond issue affect a big British retailer? On the surface it makes no sense. Such are the dangers of the short term.

Recently currencies have settled down and money has flowed back into shares and we have had a rally. The question is: are we now in a medium-term bear market or still in the bull market that began last year after the crash?

I think the answer is neither. As galling as it can be, I think we are at the beginning of an extended period of sideways trading where the market will rally and fall within a wide range without crashing horribly or breaking into exciting new upward territory. This could go on for a couple of years.

Until the currency markets have readjusted to pre-crash normality, stocks will not get a good platform for a significant bull market. This readjustment is going to take time and will complete when the yen returns to sensible levels but that process may be interminable.

Once this occurs the last leg of the credit crunch will be over and we will enter a new market; one which will bear little resemblance to the cycle that actually began in 2000 with the dot com crash.

This is a long-term view. The realities of long-term investing are: you get rich slow. Otherwise you concentrate on the short term and you get poor quick.

• Clem Chambers is chief executive of stocks and shares website ADVFN and author of 'The Twain Maxim', out now on paperback. See www.advfn.com