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A Winning Investment Strategy

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It is highly unlikely that you, as an investor, will fail to reach your financial goals because you miss out on some seemingly incredible investment opportunity which promises mind-blowing returns in a short period of time. It is much more likely, however, that you will fail to reach them as a result of succumbing to your own fear, greed, and insecurity. Over at the Motley Fool, columnist Morgan Housel wrote recently that “(t)he vast majority of financial problems are caused by debt, impatience, and insecurity.” He takes this even further, saying:

People want to fit in and impress other people, and they want it right now. So they borrow money to live a lifestyle they can’t afford. Then they hit the inevitable speed bump, and they find themselves over their heads and out of control. That simple story sums up most financial problems in the world. Stop trying to impress people who don’t care about you anyways, spend less than you earn, and invest the rest for the long run. You’ll beat 99% of people financially.

Later on, in the same column, Housel recommends a simple investment strategy. In doing this, he uses two recent news stories. In one of those stories, the University of California has recently lost more than $100 million on a complicated interest rate swap trade. In the other, Warren Buffet has made great returns over the last several years by buying a farm in Nebraska. These two stories give just one of many examples of how simple investment strategies usually win over complicated yet short-sighted ones over the long term.

Usually, it is better to not listen to the pundits when they tell you that you just have to do something–now. Instead, take the time to understand your own goals and investments, and be willing to trust your own understanding and instincts over the long term.

**Note: For further reading on Warren Buffet’s rationale for buying and holding his farm in Nebraska, go here.

 

The January Effect

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The photograph above depicts, almost exactly, what the woods around my home have looked like for at least the last month, perhaps more. Long snowy days and prolonged frigid temperatures have made it seem as if the snow would never melt! In fact, it has only been within the last week that we have been able to walk on bare ground, rather than trudge through snow. Maybe this could be called the “January Effect,” at least upon the weather in my part of the world.

This extreme weather pattern brings to mind a supposed stock market phenomenon that some investors and market participants adhere to, called the January Barometer. This idea holds that market performance in January is a predictor of what the market will do for the rest of the year. Thinking about this as it relates to this past January would tend to scare off most investors, as the market tanked right at 3%!

However, a close look at historical data shows that the so-called January Barometer is not really, in itself, a great (or even good, really!) predictor of stock market yearly performance. In fact, when examined closely, the January Barometer tends to follow the same trend as other overly-simplistic theories which are often used in an attempt to explain the market.

The following quote is taken from Alex Rosenberg at cnbc.com. Rosenberg looks at data from the past 35 years, and says the following:

Going back to 1979, the S&P rose in 23 out of 35 Januarys. Over the next 11 months, the market consequently rose in 19 of those 23 years that were kicked off by winning Januarys—meaning that a positive January has successfully predicted a winning February-through-December 83 percent of the time.

But in the 12 years when the market fell in January, the market only followed along in four years. That’s just a 33 percent success rate.

The reason that positive Januarys prove to be a great barometer, and negative Januarys a terrible one, is the same reason that the “January barometer” appears to exist in the first place: Stocks rise.

So, as an investor or market participant, do not let your financial plan and goals be undermined by the negative weather or market conditions of a cold or down month in January. Take heart and stay disciplined, because as sure as rain falls in Scotland and the money supply in the US increases, stocks will also rise.