Streetwise for Jan 3,  2010

Streetwise

Lauren Rudd

Sunday, January 3, 2010

The Markets Are Full of Possibilities

“...The world looks brand-new,” said Hobbes. “A New Year...a fresh clean start,” said Calvin. “It's like having a big white sheet of paper to draw on," said Hobbes. “A day full of possibilities,” said Calvin. “It's a magical world, Hobbes old buddy...let's go exploring.”

Bill Watterson wrote those words in December of 1995 as he concluded the last of his Calvin and Hobbes comic strips. Every year since then I open my first column of the New Year by quoting that phrase because the message is so abundantly clear. The financial markets are analogous to Calvin's magical world...full of possibilities. All that remains is for you to go exploring.

Looking back on 2009, Wall Street astonished virtually everyone. The Dow chalked up a gain of about 20 percent, the NASDAQ nearly 45 percent, while the S&P 500 gained approximately 25 percent, putting it on track for its best year since 2003.

However, history is not what is at issue here. Rather it is what you are going to do going forward that counts. And despite what you may have been told recently, investing in stocks is still the greatest wealth builder of all time.

If you are apprehensive as to your ability to adroitly invest going forward, take heart. Successful investing is not difficult. As Warren Buffett once said, "Success in investing doesn't correlate with IQ once you're above the level of 25."

Common sense, combined with a modicum of patience, will often produce annual gains of between 11 and 15 percent. Nonetheless, there will be times when stochastic events of an exogenous nature will take their toll. It is the nature of the beast.

The only real damage comes from panic induced selling. A better solution is to allow your mutual fund dividends to reinvest at the lower share prices. That is if mutual funds are your route of choice and I do not recommend them. The primary reasons are high fees and low performance, with most failing to outperform the S&P 500 year after year. A better strategy would be to devote your attention to asset allocation via a portfolio of individual equities and bonds.

Now wait a minute you say. If the consensus is that most mutual funds cannot outperform the S&P 500, how can the average mere mortal be successful? The answer is easy. You are not weighed down with astronomical overhead, the need to finance redemptions or to undertake a continuing turnover in your portfolio to justify your existence.

In addition, with stock prices still relatively low, your investment risk remains manageable, while once again giving you an opportunity to achieve substantial gains going forward. No, I am not going to be so rash as to try and predict the short-term future of the markets. Without the late Madam Marie of Asbury Park and her crystal ball that would be futile. On the other hand, here are some tidbits to consider.

First, the Fed has made it abundantly clear that interest rates are likely to remain at their current low levels for the next one or two quarters and possibly through all of 2010. Inflation is benign and the financial markets are forward looking, meaning that Wall Street tries to anticipate the economic conditions six months out. To that end, I believe the economy will continue to gain ground in 2010 as unemployment falls.

Yet, over the next few weeks you are going to be inundated with market forecasts of every description. Many will try to conjure up a primordial fear of Wall Street, but offer salvation if you immediately subscribe to this or purchase that. Do not to fall sway to the passions of the market, the tenets of its prognosticators or those selling new improved versions of snake oil. Instead, consider the words of Wall Street legend Lucien Hooper.