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The mainstream media loves hyperbole — so nothing pleases reporters more than the kind of big stock market rally we just had followed by last week’s subsequent drop.
But great headlines don’t help you make better investment decisions.
That’s why I think it’s so important to add context to shorter-term market moves.
For example, March 9 marked the third anniversary of the last bear market low — and in the three years since, the broad market S&P 500 had risen 102.5 percent.
That’s an average annual gain of roughly 34 percent … and it demonstrates the kind of profits you can make with good timing and nerves of steel.
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Of course, using other timeframes changes the conversation entirely!
For example, if you use the bear market bottom in 2002, the total market gain is only 76.33 percent … over a MUCH longer period.
And if you go back to the last bull market high of October 9, 2007 — the market was actually still DOWN 12.49 percent!
You could certainly take this as an argument in favor of market timing. But practically speaking, I recognize how difficult it is to actually call those tops and bottoms. Hopefully you do, too.
That’s why I’d like to add a couple other layers to our analysis here — things that can make the raw timing issue a lot less important.
Let’s Start with the Idea of Sector Rotation …
I’ve often pointed out how crucial it is to understand the workings of various types of businesses — in relation to economic cycles, the broad market’s performance, and each other.
Take utilities, for example.
Through March 4, utilities in the S&P 500 had risen 55 percent — in other words, they had underperformed the broad bull market by about half.
Yet if you go back to the longer period from the 2002 bottom, they had risen 129 percent — far MORE than the broad market.
And Then There’s the “Dividend Difference” to Consider, Too!
Because if you add in dividend payments, those utility companies ended up with a total return of 231 percent since the 2002 low!
Even over shorter periods, dividend payments can give you a much bigger margin for investment error or market gyrations.
Want proof? Look no further than financial stocks.
Over the same 2002-2012 period, they lost 20 percent as a group. But once you add in dividends, they end up even for the ten years!
So the bottom line is that you can’t let a headline performance figure or short-term moves force you to make knee-jerk reactions in your portfolio …
Make you feel like you’ve been missing out …
Or even get overly confident that you’ve been doing a lot better than most other investors.
As with any type of measure, there are always other dimensions that might not be coming through in that number — and it’s always important to view your holdings through a number of different prisms.
Meanwhile, there IS very strong evidence in favor of strategies that consider major timing issues, sector rotation, and the performance-boosting effects of dividend payments. That’s why all three of these things will remain critical to the approach I use in my Income Superstars portfolios going forward.
Best wishes,
Nilus
