Samples of Archived Commentaries:
June 1, 2002
Market Indicator Turns Negative
Historically, the US stock market has performed better from October to April than it has from April to October. We expect that to be the case this year. Moreover, as we have discussed before, we expect the investing climate for the next 8-10 years to be far different than the period of the 1990's. The forthcoming period will sorely try the nerves of investors. Nothing that they have learned during the period of time that they enjoyed positive investment results will seem to work. It will be a time of disillusionment.
Not only will this disillusionment pertain to their results, it will, even more so, be directed at the source of their investment guidance. For one thing, in the arena of human nature, discouragement cries out for a scapegoat. For another, to blame the source of wretched investment advice will, in many cases, be justified. The current scandal involving Merrill Lynch's analysts involves all of Wall Street firms (and don't expect any grand stand moves by politicians to change that).
Except where an individual advisor or broker has the fortitude, the discipline and the smarts to rise above the so-called guidance of self-serving brokerage firms and mutual fund companies, the average investor is going to be poorly served. To get good advice, one must, at minimum, seek out someone who is directly compensated for the accuracy of their advice, has an identifiable track record and, most importantly, does not have a vested interest in selling a particular product or line of products.
Back to "April to October," please remember that in the type of flat to dangerous market that we envision, it is far better to forego a potential profit than to chance losing money. Our number one rule of investing is to not lose money. Sure, neither you nor we can avoid having losses at times, but it is the big losses that we must avoid. The reason for that might seem all too obvious but there are other very important reasons for not losing money and the chief among them is that one loses perspective. That, as we said in our last letter to you, is when trouble begets trouble.
We mentioned in last month that it would be wise for investors to adopt a cautious stance with respect to their exposure in the markets as our Market Indicator was close to giving a Negative Signal. During the second week in May we did indeed get that Signal. What does this mean to a 401(k) investor?
First of all, hopefully, as a subscriber, you have already taken steps to reduce your exposure to the stock market due to our recommendations in the May 2002 Newsletter - in particular those areas which tend to be the most volatile, i.e. growth, technology, and Nasdaq areas. It now means that additional steps should be taken to avoid taking on too much risk during this difficult market. What are those steps?
There are several ways to reduce your market risk, or protect against losses. One way is to be invested most heavily in the funds at the top of our Mutual Fund Rankings. Currently, the top performing funds are those pertaining to gold and hard assets, international equity markets, value stocks, and money markets.
That leads to another strategy to guard against losses--allocate more investment money to the money market fund. Contrary to the opinions of many, money market funds do represent a legitimate and appropriate investment option, at certain times. Even though a money market fund does not bring with it high reward potential, especially with today's low rates, it is a good place to put your money during difficult or declining markets. That is the reason we include money market funds in our rankings. Even with their low yields they can demonstrate good relative strength by virtue of the other funds acting poorly. That is the case currently.