I constantly receive requests from readers wanting to know more specifics about what I do. They are talking about my investments. Apparently, they have the uneducated belief I know something they don't from having been in this business for the past 953 years. Nothing could be further from the truth. I have always taken the basic tip from the financial gurus that asset allocation is vital and so my portfolio has a mix of stocks, bonds, real estate, and precious metals. And I rarely, if ever, do I speculate. I don't look to take too much risk but believe in having a solid foundation on which to build. Kind of like the tortoise and the hare. And, notwithstanding having a Type A personality, I still move rather slowly when it comes to investments.
In any event, we all remember that at this time last year, the experts were saying that it would be a solid year for stocks. The truth is that 2005 revealed stocks and bonds producing returns below the norms. In fact, the S&P 500 gained 5.58 percent, which may be considered okay to some, but disappointing to others.
However, you have to put things in perspective. Although the economy was fairly strong last year, stocks were somewhat hampered by a series of events: rising energy prices (price of oil skyrocketed from $42 a barrel to $70 in the third quarter), hurricanes, and fears of inflation. Keeping these in mind, stocks didn't do too much, at least not compared to many other countries which had pretty good gains: Japan where the Nikkei Index was up by almost 40 percent for the year and the MSCI Euro Index which posted an increase of 21 percent.
On the bond market side, short-term interest rates rose on a constant basis over the course of the year. Kathryn Head, chairman of First Investors, and a pretty good observer of what happens in various markets, notes that today marks the first time in five years that a phenomenon known as inversion has occurred. "The huge demand from foreign investors for U.S. Treasuries has played a significant role in keeping longer-term yields relatively low. Even so, they continue to be high relative to those of other developed countries, and thus attractive to foreign investors."
We all know that Ben Bernanke takes over from Alan Greenspan and this occurs when many experts feel that the Fed is ending its campaign of tightening the belt. Moreover, oil prices have fallen and this can only help the economy and the market. Accordingly, many think that this year we'll see a better stock performance although Head feels "There is some concern that the yield curve inversion could foreshadow an economic slowdown."
No matter what certain markets may indicate, you have to keep in mind the fact that financial markets are generally cyclical. A flat period, or even a negative one, may follow a positive performance. For example, when stocks go up, precious metals usually come down, and vice versa. This all comes back to what I said at the top of this column: A diversied portfolio is the best means of neutralizing the constantly changing market conditions.
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