Is A January Stock Correction A Tell Tale Sign for 2014?

Investors commonly believe that January’s performance can be somewhat of a telltale sign about how the rest of the year will go.

The idea that as goes January, so goes the rest of year. It has been a surprisingly accurate measure, correct 89 per cent of the time since 1950, according to Stock Trader’s Almanac.

Longer term, it’s been pretty accurate, too. If the Standard & Poor’s 500 rises in January, markets rose that year 88 per cent of the time since 1936, says Ken Winans of Winans International. Meanwhile, if the market as down in January, stocks fell 80 per cent of the time. January is of keen interest this year as investors wonder if stocks can repeat their strong performance from last year.

So far, during the month of January, the S&P 500 is down 1.4 per cent. The S&P TSX index is up 1 per cent.

But Winans warns investors from reading too much into January. The indicator does fail. For instance, the market fell 3.7 per cent and 8.6 per cent in January 2010 and 2009, says Stock Trader’s Almanac. And both years, the market ended quite a lot higher.

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Market Corrections: The brightest shining stars can turn dim in an instant.

Optimism rules. Almost two thirds of investment professionals expect the global economy to expand in 2014, according to a CFA Institute survey. And 71 per cent picked stocks as the asset class most likely to perform best, a big jump from 50 per cent last year.
 

If you invested in the stock market in 2013, you had excellent returns in both Canadian and U.S. equities.

It was a surprising outcome for a year in which all the news seemed gloomy. The TSX composite index was up 9.6 per cent (not including dividends) and the S&P 500 index was up nearly 30 per cent.

Optimism rules. Almost two thirds of investment professionals expect the global economy to expand in 2014, according to a CFA Institute survey. And 71 per cent picked stocks as the asset class most likely to perform best, a big jump from 50 per cent last year.

All is not rosy, however. Canadian respondents see a lack of ethical culture in financial firms eroding investor trust – in particular, pressure by advisers to sell products that may not suit investor needs.

I’ve been investing for long enough that I know caution is always warranted. There’s never a slam-dunk solution. The brightest shining stars can turn dim in an instant.

I like to buy and hold blue-chip stocks for years at a time (and reinvest the dividends). I’m skeptical of market forecasts, since so many go wrong.

Here are six things I’ve learned as an investor:

Buy profitable companies. Don’t buy dreams. You’re better off owning lucrative money spinner Google (even if you buy a single share at $1,150 U.S.) than yet-to-make-money Twitter. No matter how great a story sounds or how promising a proprietary technology may be, says Irvine, buying a company without profits is speculation.

Look for rising dividends. Money-making companies can hold on to their profits or give part of their profits to shareholders in the form of dividends or share buybacks. A rising dividend shows that a company is confident about its future, says David Baskin of Baskin Financial, an investment management firm. Rising dividends are paid from rising profits. And rising profits lead to higher stock prices.

Look for share buybacks. When companies buy back their shares, they reduce the number of shares held by the public. This means higher earnings per share for shareholders, even if the firm’s profits stay the same. Since 1998, says Baskin, companies that buy back at least five per cent of their shares have delivered an annualized return of 13.8 per cent vs. 6.7 per cent for the overall S&P 500 index.

Cut your losses quickly. Don’t fall in love with stocks. Don’t refuse to recognize the reason you bought a stock has changed for the worse. Just leave, says Jim Cramer, who bought Sears as a real estate play for his charitable trust. Later, he decided it was an earnings play. “What a fool I was,” the flamboyant TV host says in his new book, Get Rich Carefully. “The reason I had bought Sears, the monetization of real estate, was gone. I was simply trying to come up with some alibi, perhaps an improvement in same-store sales, to justify the story.”

Don’t worry about a market correction. Stock marketsdon’t go up indefinitely. Optimism can push prices ahead of corporate profits, forcing a return to fundamentals. “We can’t predict when the current bull market will end, when the ‘correction’ will begin, how long it will last or how severe it will be,” says U.S. adviser and author Dan Solin in the Huffington Post. “You can’t base a sound investment plan on the unsupported musings of ‘experts’ who claim to have an ability to predict the future.”

Don’t hold only stocks. You can lessen the impact of declines by holding bonds and cash, even if they barely keep up with inflation. Bonds tend to rise when stocks fall, as central banks cut interest rates to boost the economy. (Falling rates make bonds with higher yields more valuable.) In its 2014 outlook, giant fund manager Vanguard urges investors to hold bonds, despite low yields: “High-grade bonds act as ballast in a portfolio, buffering losses in riskier assets.”

You can try to predict the future, but you’re only guessing. It’s better to find an investment strategy that works in good or bad markets and stick to it.

Ellen Roseman writes about personal finance and consumer issues.

http://www.thestar.com/business/personal_finance/2014/01/19/6_things_ive_learned_about_investing_roseman.html