Long-Term Predictions Sure To Go Wrong

    We are concluding a month that famously provides predictions sure to go wrong.  Financial publications depend upon sensationalism to sell their product, and the best way to bring in new subscribers is with claims to have some type of superior knowledge you can benefit from.  The problem is they have no such knowledge.  Since nobody seems to be held accountable it is easy for new suckers to be born every year.

    I am not against analysis and strategic investing.  What I am against is the audacity of some who feel they can accurately tell you what the best stocks are for the next decade, or which mutual funds will be the best ones to own for the future.  Look at the way the markets move and ask yourself if you think such long-term predictions can be done accurately.

    Every year Smart Money and Money Magazine release their 100 Best Mutual Funds lists.  I challenge you to try to find a link online (that actually works) that will show you one of their lists from the past.  It’s impossible.  I had to go to the library to look at the archives.  With the lack of success their list has historically had, I can see why every link online fails.  The readers of these lists resemble a revolving door.  New readers come in, get burned never to return, meanwhile a whole new crop of “pie in the sky” readers are continuously coming through the door.  Stop!

    In the August 2000 issue of Fortune Magazine they listed the “10 Stocks to Last the Decade”.  Of the 10 stocks listed, two are no longer in business, seven finished the decade down, and only one finished the decade higher.  This lack of success was not specific to Fortune.  I could have pointed out hundreds of so-called “expert” predictions for the same period of time that had done just as bad, and many were worse.  We do not know what is going to happen in the world next week, next year or in the next decade.  If I had told investors in January 2000 to raise their hands if they thought the S&P 500 index would end the decade down, how many hands do you think would have been raised?  Yet that is exactly what happened.

    I strongly encourage you to ignore the sensationalism.  Whether the markets are skyrocketing or whether they are in free fall, there is always someone out there trying to take advantage of the emotions individual investors are most likely feeling at the time.  For example, consider the body of work from Harry S. Dent, Jr.  When I got into the business (many years ago) his book “The Great Boom Ahead” was all the rage.  Financial advisors, throughout the 1990’s, would host seminars luring in new clients purely based upon this book.  That book was soon followed by his book “The Roaring 2000’s”.  This was perfect timing to coincide with investors emotions at an all-time high as they chased the internet bubble.  Well it seems the 2000’s weren’t as “roaring” as Harry predicted.  Not to worry because his latest book “The Great Depression Ahead”, released in 2009, will surely put Harry back on track.  His books seem to be geared towards selling the market what it wants to hear at the time.  Individual investors buy this garbage.  I guess if I really wanted to make sure my book sold well then I would have come up with a crystal ball type of title.   

    You would be much better off ignoring all of the “expert” opinions.  There are many reasons for this and here are a few: 1) The expert might be wrong, 2) You will rarely know when the expert has changed his/her opinion, and 3) The common sense you possess far outweighs expert opinions that probably do not pertain to you.  The experts telling you what you should invest in have no idea how long you have to invest or what investment experience you may or may not possess.

    I personally know and follow hundreds of wonderful strategist doing great work.  The sad thing is they are automatically discredited by financial advisors at the major firms.  The same advisors who cling to the long-term unpredictable work that the firms they represent produce.  What is wrong with considering opinions from experts focusing on how to try and make money today?  These people are experts in technical and securities analysis, which is something the majority of financial advisors, who dismiss these experts, have no training.  I have much more respect for those trying to work in the moment rather than trying to position themselves for ten years down the road.

    In the end it is up to you, the individual investor, to make the decision to stop investing in sensationalism.  If you choose to educate yourself, and consider the source, then you can stop being a part of the majority who likes to be spoon fed.  If enough of us stop buying this product then the old guard will stop rolling out the money to produce their sensationalized views.

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success   www.allocationforlife.com

Natural Resources Shine In The Month Of February

    It is that time of the month when I explore what sectors have typically shined in the upcoming month, and when I come across sectors that have not historically done well in the upcoming month.  After researching the average mutual fund performance data for the eleven sectors that comprise our economy between 1987 and 2011, it is clear that Natural Resources have significantly outperformed the rest of the market.

Consider the following returns:

	Natural Resources	S&P 500	Health Care	Utilities
1987	3.50%	3.95%	11.97%	-3.04%
1988	3.67%	2.53%	2.45%	-1.57%
1989	-1.21%	-2.49%	-0.66%	-1.41%
1990	1.13%	1.29%	0.52%	0.50%
1991	8.86%	7.15%	9.67%	4.04%
1992	0.71%	1.30%	-3.01%	-0.29%
1993	9.36%	1.36%	-11.72%	4.56%
1994	-2.37%	-2.71%	-2.86%	-3.99%
1995	3.74%	3.90%	2.59%	0.80%
1996	2.05%	1.60%	2.34%	-0.78%
1997	-2.50%	0.78%	-0.12%	0.23%
1998	2.86%	7.21%	5.39%	3.45%
1999	-3.27%	-3.11%	-4.39%	-3.00%
2000	-2.14%	-3.21%	17.56%	-1.49%
2001	0.73%	-9.12%	-3.40%	-2.08%
2002	4.98%	-1.93%	-2.97%	-2.27%
2003	2.68%	-1.50%	-2.40%	-3.30%
2004	5.76%	1.39%	1.66%	1.98%
2005	11.66%	2.10%	-0.78%	2.52%
2006	-8.58%	0.27%	1.48%	0.49%
2007	1.10%	-1.96%	-1.88%	2.40%
2008	11.13%	-0.56%	-0.89%	-0.12%
2009	-7.76%	-10.6%	-11.06%	-10.54%
2010	2.94%	3.10%	1.25%	-0.06%
2011	4.50%	3.43%	2.71%	2.38%

    Over the last twenty-five February's the average natural resources mutual fund has finished in positive territory eighteen times.  That means that 72% of the time, over the last twenty-five years natural resource mutual funds, on average, have made money in the month of February.  Over that same period of time the S&P 500 index posted positive returns in fifteen of the last twenty-five February's, or 60% of the time.  The results may seem highly correlated but when you look at the total return provided for the month of February in the time period examined you will see much more bang for your buck with natural resources. For example, the average annual compounded return for natural resources funds for the time period examined (approximately 700 days) equated to 29.76%.  The average annual compounded return for the S&P 500 during the month of February from 1987 to 2011 was only 1.07%.

    My research also found two particularly weak sectors for the month of February.  Those sectors were utilities and health care mutual funds.  The average performance for these two sector funds showed that utility funds have only posted gains in the month of February eleven times over the last twenty-five years (44% of the time), and that the average health care fund has posted positive returns twelve times (48% of the time).  What is interesting about this data is that it is flipped from the data researched for the month of January.  If you remember an earlier post of mine it showed that health care funds were traditionally the strongest performing sector in the month of January, while energy funds (many energy stocks are found in a natural resource fund) were the weakest sector.  I am already starting to see a rotation.  As we near the end of January, CNBC reported yesterday a noticeable infusion of capital into energy stocks.  Perhaps money managers have noticed the same trend that my research yielded.

    Obviously we do not know what the month of February will produce, but based on the past twenty-years of data coupled with the need for a possible hedge against Iranian threats to close down oil shipping lanes, we could see a rather robust February once again for natural resources and energy equity investments.  A further boost could be seen if winter-like conditions normalize in the northeast, as opposed to the rather mild winter we have been experiencing.

    You can position yourself in a couple different ways for the month of February.  The SPDR S&P Global Natural Resources ETF (GNR) would give you access to natural resources.  If you prefer a more energy specific approach then I would suggest the Energy Select SPDR ETF (XLE).  You may also want to research mutual funds in these sectors that have outperformed their category average.  If you take this approach you need to avoid mutual funds with sales charges because they will eat away at any return that may come in the month of February, and you should also be aware of any surrender charges that may occur if the fund is not held for a specific length of time.

Thank you and good luck everyone!

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”

Breaking Down The "January Effect"

    We have all heard about the “January Effect” when it comes to the markets.  The theory is, as goes January so goes the rest of the year.  If there is validity in this theory then investors in our domestic markets may be in store for some good gains in the year 2012.  The S&P 500 is currently sporting a gain of 4.63% for the year as of the close on January 19^th.

    I thought it would be interesting to look at the last 25 years and see firsthand if the “January Effect” holds water.  The data was compelling enough to share, and even more interesting after it was dissected a bit further.  Here are the returns of the S&P 500 for the month of January and the calendar year covering the years 1987-2011:

	January	Year		January	Year
1987	13.47%	5.25%	2001	3.55%	-11.9%
1988	4.21%	16.61%	2002	-1.46%	-22.1%
1989	7.32%	31.68%	2003	-2.62%	28.68%
1990	-6.71%	-3.10%	2004	1.84%	10.88%
1991	4.36%	30.47%	2005	-2.44%	4.91%
1992	-1.86%	7.62%	2006	2.65%	15.79%
1993	0.89%	10.08%	2007	1.51%	5.49%
1994	3.40%	1.32%	2008	-5.99%	-37.0%
1995	2.59%	37.58%	2009	-8.43%	26.47%
1996	3.40%	22.96%	2010	-3.60%	15.06%
1997	6.25%	33.36%	2011	2.37%	2.11%
1998	1.11%	28.58%
1999	4.18%	21.04%
2000	-5.02%	-9.10%

    The data clearly shows a correlation between the S&P 500’s January performance and its calendar year performance.  In 19 of the last 25 years you could accurately say “as went January as went the year”. Let’s dig a little deeper into the data and look at the 6 years that the “January Effect” did not hold true.  I can easily throw three of those six years right out the window based upon the market conditions at the time.  For example, in 2001 the year began with a January gain for the S&P 500 but then finished the year down 11.89%.  What happened in 2001? The disgusting terrorist attacks of September 11^th.  I remember throughout that year many economists believed the economy and the markets were beginning a turnaround.  In 2003, the S&P 500 had a negative January but finished the year strong with a gain of 28.68%.  Where were the markets in January 2003?  Near lows that occur when the baby is being thrown out with the bathwater.  As in 2003, the same can be said for 2009.  Coincidentally, or maybe not, in both 2003 and 2009 the market lows were reached in the month of March.

    There were only three calendar years where the gain for the S&P 500 in the month of January would have been greater than the entire gain for the calendar year.  Two of those years, 1994 and 2011, the difference was so marginal it is not worth examining.  The other year was 1987.  Why was the gain for the S&P 500 so great in the month of January 1987 and not for the calendar year of 1987?  Oh that’s right, a little historical thing called the crash of ’87 occurred in the month of October that year.

    What I believe the data shows is that barring the unpredictable (and no you can’t predict anything), the “January Effect” has been accurate.  The correlation has only failed in years when the S&P 500 was near the end of an irrational market (as was the case in 2003 and 2009).  We certainly are not coming off a year or going into a year with any such market move in our rearview mirror. 

    You can ignore the data but it shows that 76% of the time, over the last 25 years, the “January Effect” was real.  Take out the three irrational years I previously mentioned and the theory has an 86% accuracy rate over the last 25 years.  So like I said before…….I am very optimistic about the year 2012!

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”