That was one heck of a ride!
Whether you call 2009 exciting, disappointing, challenging or frustrating, it's behind us, and the new year beckons investors to drive looking though the windshield rather than the rear-view mirror.
Those who panicked and sold during first-quarter 2009, vowing to not own investments until the outlook improved, missed an outstanding opportunity to profit from one of the strongest upward moves in the history of the markets, with the Dow Jones industrial average up 18.8 percent, the Nasdaq up 43.9 percent, and the S&P 500 up 23.5 percent for the full year.
But what about 2010?
What to do
No crystal ball is clear enough to foresee what will happen, although that will not keep the pundits from their predictions. Having said that, we join the list of those who have opinions about where and how funds should be invested this year.
• Certificates of deposit. If these are your preferred holdings (they aren't ours), they should be within the framework of laddered maturities. Ideally, you should have a CD maturing every six months in order to adjust for increasing interest rates.
• Bonds. Because of our continuing concern about the government's deficit spending, our outlook for interest rates calls for upward pressure. In that scenario, shorter bond maturities remain more attractive than long maturities. Individual investment-grade corporate bonds with specific short to intermediate maturities, laddered with the CDs mentioned above, are preferred over U.S. Treasury obligations or bond funds. For aggressive client portfolios, we continue holding an exchange-traded fund (symbol TBT) that functions at twice the inverse of the price of the 20-year Treasury.
• The markets. As measured by the Dow Jones industrial average, Nasdaq and S&P 500, markets will be more selective than was the case in the 2009 run-up. Trading, rather than long-term investing, will probably be the mantra. How much easier it would be if we were in an era of "buy and hold"? But we aren't, yet, so don't put most or all of your funds in an S&P 500 index fund.
• Individual stocks. As Sam, my 3-year-old grandson, says, "Be v-e-r-y careful." There are techniques that should be followed, as well as behavior that must be avoided. (We'll discuss human behavior and investment pitfalls next month.) Strong balance sheets and income statements remain the foundation for stock selection. For the majority of your holdings, the price-to-earnings ratio relative to the earnings growth rate should be reasonable. Ideally, a stock's price/earnings growth, or PEG, would be less than 1X, but in high-growth issues (tech stocks come to mind) no greater than 1.5X, especially important if you are looking for downside protection.
• Stock dividends. Don't overlook the many high-quality common stocks that pay dividend yields well in excess of CD rates and that raise their dividends regularly, providing a degree of downside protection. Diversification among asset classes and styles is important: We all know the risk of too much concentration in a single issue or industry, or for that matter, country. (The U.S. is not expected to grow its gross domestic product as fast as those of several emerging market countries.)
When to move
Those are some of the fundamentals that are used to tell us what is attractive to own. What about the technical factors, the tools that give an indication of when to acquire them?
Do not ignore this aspect of your buy/sell discipline. Measuring accumulation or distribution in individual issues - and the markets - is critical in a trading environment. We use a weighted combination of time, price and volume indicators to determine when to buy or sell. As a starting point, you might want to explore exponential moving averages of varying numbers of days (20, 50 and 200 are used often), relative strength charts (Wilder RSI is one) and volume trends. You can learn more about these and other indicators, and the merits of using them in combination, at any number of Internet sites. Just search the keywords "technical indicators" or "technical analysis" to get started. If you do not have the time to do this type of analysis yourself, ask your financial adviser to explain them, and then set the parameters
Fundamental and technical analysis requires discipline. You can't say, "This time I'm going to make an exception. I feel like this stock is going higher/lower."
The market doesn't have feelings, but it does have plenty of lessons to teach the undisciplined.
Clark Davis is a 37-year investment veteran and CEO of St. Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.
