On New Year’s Day, Congress and the White House reached resolution regarding the “fiscal cliff,” and the next day the Dow Jones Industrial Average climbed 308 points (2.35%). Those of us in the investment business love to make predictions to show how smart we are. Of course, we aren’t always correct with our predictions, but when we are, we make sure to brag about it. And when we get it wrong…well, there’s always a good reason why we got it wrong and it wasn’t our fault it was wrong. But when we get something right, we make sure you know it.
In my last couple of monthly commentaries, I assured you that Obama and Congress would come to some sort of an agreement…mainly because they really didn’t have any other choice (see Twinkies and Ding Dongs). In addition, I said the removal of this last “uncertainty” would be positive for the equity markets and that we had increased the equity allocation to our portfolios in anticipation of such an event.
So far, so good with that prediction. It’s only been a week and it’s always dangerous to get overconfident in our business, but at Boyer & Corporon Wealth Management, we don’t see any compelling reasons to run from this stock market right now. Although the economy is growing very slowly (the slowest growth EVER this long after the end of a recession), it is still GROWING. And growth will continue throughout 2013…and it will continue to be slow. Unemployment was around 8.5% last January and it is now 7.8%. Not impressive but going in the right direction.
The next significant uncertainty will occur in late February or early March when the U.S. needs to raise the debt ceiling again or risk defaulting on its debt obligations. Don’t worry about this one either. The media will have a field day making you worry about it but you should ignore the media. The U.S. is not going to default on its debt obligations.
With all the major uncertainties of 2012 out of the way…and no major uncertainties in the near future, it would not surprise us to see global stock markets climb higher throughout the first half of 2013. If that happens, you can expect us to reduce our equity allocations at that point because we don’t expect any kind of sustained long-term bull market rallies for many years.
Which leads me to my next point. You may have heard how a “buy and hold” strategy is the best strategy for investing in stocks. You know…buy a good company and just hold it for years and years…like the billionaires do. I think we can all agree that any kind of investing is easier when you are a billionaire. But for the rest of us, trying to get a decent return in the stock market is certainly more challenging than it used to be.
Most Virtually all market predictions are based on history (i.e. this is what the stock market has done in the past…therefore, this is what it is going to do in the future). History is all we have to go on so we use it as much as we can. Most of us “experts” would like to think our market predictions are based on the future, but we can tend to have an inflated opinion of our prognostication abilities (and, as I pointed out earlier, we only tell you about the ones that worked out correctly). The reality is no one really knows what the stock markets are going to do.
So what has been the conventional stock market advice since 2000? Buy and Hold. Why? Because, prior to the year 2000, “buy and hold” was a tremendously successful strategy. You didn’t have to BE smart to LOOK smart during that period. A chimpanzee with a hand full of darts could have done it. Just buy stocks and hold them. During the 18-year period from 1982 to 2000, the S&P 500 increased over 18% per year on average (see chart below).
However, since the end of 1999, the S&P 500 has increased a little over 1% per year (including dividends)…not the kind of return you were hoping for. During the past 13 years there have been wild and dramatic market swings…swings that provided opportunities to slightly enhance your overall return (see chart below). But you didn’t enhance your overall return using the “buy and hold” strategy. Your “good stocks” just went up, then down, then up, then down and then up again. Net return? 1% – 2%.
However, if you had decreased your allocation to equity after large market rallies (no, you did NOT have to pick the absolute top) and had increased your allocation to equity after large market sell-offs (no, you did NOT have to pick the absolute bottom), you might have eked out an average of 3% – 4% per year. Nothing to celebrate, but slightly better than “buy and hold.”
In long-term bull markets, “buy and hold” is a great strategy. In volatile, sideways markets, it’s not so great.
During 2012, the S&P 500 increased 16% and the EAFE Index (Europe, Australia and the Far East) increased almost 18%.
Inflation remained in check and interest rates remained low throughout 2012 as the Federal Reserve Bank has continued to buy mortgages and Treasury Bonds. At Boyer & Corporon Wealth Management, we don’t view 2013 as the year of inflation and higher interest rates. We see income as an important component of investments (stocks which pay dividends, corporate bonds, municipal bonds, etc.) and are not concerned about reducing the duration of our portfolios (yet). As mentioned earlier, we feel the equity markets have some more upsides in early 2013 and, as such, have increased our allocation to equity (slightly). And because we are NOT subscribers to the “buy and hold” strategy in a sideways market, we will reduce our equity allocation after any significant stock market increase.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.