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The Secret to Successful Investing

Despite many of the so-called green shoots in the economy turning brown, the propaganda machine on Wall Street keeps churning. Wall Street is telling the public to buy, buy, buy.....

Here is something they aren't telling you. There is some interesting data complied by Barry Ritholtz of The Big Picture blog. The data shows what would have happened if someone invested $10,000 every January 1st from 1994 to 2009 in either the S&P 500 index with dividends re-invested or into bank CDs.

The money invested into bank CDs would now be worth $207,509 while the money invested into the S&P 500 would now be worth only $178,253. Other studies have shown that in the period from 1968 to 2009, bonds actually outperformed stocks. Stocks for the long term?

And let's not forget that during the past 10 years, the S&P 500 index has lost 37 per cent before dividends. On the other hand, during the past 10 years, gold has returned 325%. Stocks for the long term?

The decision on where to invest one's money - stocks, bonds, commodities - is extremely important. After all, the average person has only about a 40 year time frame at most to save for their retirement. They can't wait decades for the stock market to just get back to breakeven.

How does the average person figure out where to put their money? One has to identify where we are in the "secular market cycle." History has shown that many financial markets go through a cycle, from peak to trough, of approximately 17-20 years.

For investors, one key problem is that an overall "secular cycle", from peak to trough, and back to trough, can take 35 years. That is a big chunk of a person's wage-earning years, leaving little room for any missteps in getting the stage of the cycle right.

So it's essential to determine where we are in the cycle, because that will likely affect returns over the next decade or so. And since people spend at most 40 years of their lives saving for retirement, not knowing where we are in the cycle leads to mistakes and losses.

Recent examples of these cycles include the period from 1966 to 1983 when the US stock market did nothing while commodities soared; the period from 1983 to 2000 when US stocks skyrocketed and commodities fell steeply; and the period from 2000 to the present where stocks have fallen and commodities have risen.

So where are you now in the cycles here in the US? If we define the current bear market in stocks as having started in 2000, we may only be half way through the whole bear market cycle.

Bonds? The bull market there is VERY extended (thanks to Federal Reserve interference), having started roughly in 1981 when Paul Volcker crushed inflation. With foreign investors seeming to be ready sellers, the bear market in bonds may be close at hand.

Commodities? If we look strictly at the cycle, it's just the opposite of the stock cycle - we seem to be about half way through the bull market cycle.

Feel free to contact me directly with any questions or comments about this article or any other investing subject.





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