Making Money Alert
Lessons Learned in 2010, Part I
12/01/2010
Discipline is the way that I live
To mankind I’ve much to give
Won’t let you bring me down
I’ll knock you out within one round
--Mind of Substance, “Discipline”
Being that we now have entered the final month of the year, I thought it would be an appropriate time to begin getting you ready for what I suspect will be both a challenging and rewarding year ahead in the equity markets. But rather than give you a predictive outlook on what’s likely to happen in 2011, I want to take a step back and look at the lessons we’ve learned in this very volatile, very eventful year.
Over the next several weeks, we’ll be taking a closer look at several of those lessons, and this week, we’ll take a look at what could be the most important lesson learned in any market year -- the importance of discipline when investing in a volatile market.
The need for extreme discipline when investing is even greater in the face of extreme market flux. To illustrate just what I mean by extreme market flux, just take a look at the chart below of the S&P 500 Index. Here we can really see the extreme peaks and valleys we’ve experienced so far this year.
We started off 2010 on the back of a very nice surge in December 2009. Then, midway through January, we witnessed a sharp pullback of 7.2% that lasted until early February. Buyers stepped in forcefully after that initial sell-off and, by late April, the broad measure of the domestic equity market had surged some 13.8% off of its February low.
Of course, the 2010 year of volatility wasn’t nearly finished yet, and in May, we saw a huge sell-off precipitated by the May 6 “Flash Crash,” where we witnessed the Dow’s largest intraday decline in history. The shock was temporary, thankfully, and the market recovered much of those losses within minutes. However, the downbeat tone definitely had been set. Save for a bit of buying in early June, stocks basically continued falling until they slid to their 2010 low in early July.
Then, the decline in stocks to just over 1,020 on the S&P 500 Index (SPX) proved to be too tempting to buyers, and that’s when the new equity surge began in earnest. From early July until early August, we saw a 9.8% spike in the index. Once again, sellers stepped in, lopping off 6.1% from the S&P’s value by the end of that month. After that, the real volatility began!
In September, stocks began a seriously bullish run that took SPX up 16.8% in just over three months. Stocks reached their peak in early November, just after the midterm Congressional election and right after the Federal Reserve’s announcement of quantitative easing part II, or QE2.
Since a November peak, stocks have pulled back about 4% (as of Nov. 30). But we don’t yet know where this decline ultimately will settle. My suspicion is that we will continue to see more ebb and flow heading into the final weeks of the year. After all, a volatile December would be a fitting end to this volatile year.
Having detailed the extreme volatility in 2010, I think you can understand why the biggest lesson learned in 2010 is the virtue of discipline.
So many market participants got caught up in the wild ride that they bought at the peak and sold at the trough. They chased performance after the gains were already made, and they sold right as stocks tanked. This is called being reactive to the market, and it’s most definitely not the rational way to manage your serious money.
The better way is to make strategic buying decisions when the market first breaches critical technical levels, and selling those positions once they begin to break down. This is easier said than done, I realize. But armed with firm buy and sell triggers, you can remain proactive and in control of your investing destiny -- and that’s a timeless lesson for any market year.
ETF Talk: Eyeing Dividends to Cushion Volatility
The recent volatility in the stock market may be a little worrisome to you, but one of my currently recommended exchange-traded funds (ETF) is producing gains from both capital appreciation and dividend income. The iShares Dow Jones Select Dividend Index (DVY) is an ETF that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones Select Dividend Index. With DVY, you own a fund that invests in a basket of the biggest and best dividend-paying stocks available.
One reason why I like DVY right now is that I think the Fed’s grand experiment of trying to boost the economy by printing money -- otherwise known as quantitative easing part II, or QE2 -- is going to be bad for the long-term fiscal health of the United States. This quantitative easing also has the possibility of creating a market sell-off in the short term, especially if the Fed fails to meet the already priced-in expectations that it will inject hoards of monetary stimulus into the economy in the coming months.
If we do see a short-term retreat in stocks, it may create a good buying opportunity for you to enter DVY. Subscribers to my High Monthly Income investment newsletter were advised to buy the fund at prices lower than its current level, so that position remains nicely profitable right now. One word of caution is that I recommend that you use stop-loss prices when you invest to lock in your profits when a position rises, or to limit potential losses if it falls.
Despite the market’s recent fluctuations, I think the trend remains relatively bullish. Events such as North Korea’s one-day military skirmish with South Korea and the need for a bailout of the debt-ridden Irish government and banks have pulled the market down of late, but both situations seem to have gained stability in recent days.
If you think a bull market remains intact, DVY gives you a chance to benefit when its price rises with the market. You also would own a fund that is somewhat protected from the worst of the ups and downs of investing because it pays a dividend. Wharton Business School Professor Jeremy Siegel has researched equities going back decades and found that the best-performing investments for long-term periods are income-generating equities. DVY fits that description perfectly.
While my High Monthly Income subscribers are enjoying increased gains in their DVY position so far today as the market rises, you could be doing likewise. DVY also is a position that I have recommended in the past. The last time I closed an investment in DVY in my High Monthly Income portfolio, it finished up 20.45%.
As you can imagine, I like to pick my spots when investing in DVY and my proven trend-following strategy has helped me to choose when to buy and to sell – letting my High Monthly Income newsletter subscribers profit in the process.
If you want specific advice about which ETFs to buy and to sell, as well as the stop-loss prices to set, I recommend that you check out my ETF Trader service by clicking here. As usual, I am pleased to answer any of your questions about ETFs. To send your questions to me, please click here. You may see your question answered in a future ETF Talk.
A Little Holiday Inflation Fun
Now that the Thanksgiving holiday is behind us, most of us have diverted our holiday attention to Christmas. I’m sure you’ve already been to a retail store or restaurant where they are playing Christmas music, and one of the most beloved songs during this holiday season is “The Twelve Days of Christmas.”
That song contains a list of 364 gifts to be given, and those gifts don’t come cheap. According to a recent Associated Press news story, buying everything from those 12 drummers drumming to that partridge in a pear tree will cost you $96,824.
That’s quite a bit of holiday scratch, but what’s even more interesting about that price is that it represents an increase of 10.8% over last year’s cost of the same items!
Now, if you’re wondering where in the heck the Associated Press got these figures, then you’re not alone. Apparently, each year PNC Wealth Management puts out its annual Christmas Price Index. Historically, the Christmas Price Index has mirrored the national Consumer Price Index -- but not this year.
This year, the PNC Christmas Price Index grew 9.2% from last year, compared with just a 1.1% increase in the much broader Consumer Price Index. More importantly, this year, PNC reports it’s going to cost me $6,294.03 to hire nine ladies dancing -- that’s a 15% increase over what I paid last year.
Hey, who says inflation isn’t real?
Get Your Precious Metals Watch List
The ETF universe now is teeming with more than 1,000 funds. Yet there is one asset class, particularly this year, that really has captured everyone’s attention -- and that’s precious metals.
Precious metals, like stocks and bonds, are an asset class which represents a great deal of risk along with the potential for big rewards. One of the biggest challenges confronting precious metals investors is dealing with the tremendous volatility in the sector.
We’ve seen this volatility in the premier precious metal, gold, since the value of the yellow metal has gyrated wildly over the past 12 months. Because gold and other precious metals generally are non-stock, non-bond correlated investments, they’ve become very attractive to individual investors, despite their propensity for volatility. This low market correlation is a crucial component for investors who seek diversification within their portfolios.
In our latest special report, “The Fabian Precious Metals Watch List,” we’ve identified 20 precious metals ETFs that give you access to both the bullion and mining segments of the best precious metals available to investors today. To get your free report, simply click here.
Presidential Discipline
“Discipline is the soul of an army. It makes small numbers formidable; procures success to the weak, and esteem to all.”
--George Washington
The nation’s first president also was a great military leader, and he knew the value of discipline in warfare and in life. In keeping with today’s theme of being disciplined with your investments, I thought it was appropriate to see what one of the greatest Americans ever had to say on the topic of discipline and the crucial role it plays in all of our lives.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to ask Doug.
P.S. I encourage you to watch my recent webinar where I was a guest speaker with another publishing company, Profits Run, to discuss how to invest your money following the Nov. 2 midterm Congressional election. To listen, please click here.
P.P.S. My publisher, Eagle Financial Publications, is now on Facebook. Click here to see our page and be sure to become a fan when you get there.