History says take note
There are two old adages about the beginning of the year that are supposed to tell us the direction of the stock market for the whole year to come. The first is "so goes January and so goes the year" and the second says the same about the first five days of trading. Say what you will about these cute little sayings, I have found them to be very accurate.
Interestingly enough, in 62 of the last 85 years the US market has moved the same direction in January as in the full year ahead. The first five days, as It turns out, is almost as good as the full January, as over two-thirds of the time since 1927 the first five days have correctly indicated the direction of the market for the rest of the year.
These sayings may make no statistical or even logical sense, but with a horrible first five days and January as a whole, they have my attention and they should have yours too.
Last year was so good for the averages and ended with such optimism that a repeat was practically impossible. Of course most investors didn't get even close to the returns of the indexes as well they shouldn't. No one retired or in the retirement red zone should be invested anywhere near the risk of the market. In the next market downturn, which may not be that far off, they would do devastating harm to their finances and not have time to make it back.
It's funny how we forget the pain and sorrow of past bull markets once things recover. The last time the market crashed it only took 6 ½ years for it to break even, which is quick from a historical perspective but a ridiculously long time if you're in or planning for retirement.
Investors must remember that in the crash of 1929 it took 25 years to get your money back. If you had bought stock in September of 1929 when the Dow Jones Industrial Average reached 381.17, you would have watched stocks collapse until hitting the low of 40.56 on July 8th, 1932. So if you had $100,000.00 invested, you watched it become $10,640. It wasn't until 25 years later, on November 24th, 1954, that the stock market itself reached its previous peak.
Of course much of the cause for this economic downturn continues to be the massive demographic changes occurring worldwide. As the developed world's population ages, they naturally spend less and prepare for retirement. We know from Facing Goliath - How To Triumph In The Dangerous Market Ahead, that people spend the most in their 30s and 40s. Well, now we're faced with too few people in those age ranges and too many past their peak spending years. This will continue until the echo boomers, the kids of the baby boomers, get into their high spending years.
The key for every investor is to be properly invested so you are getting the best returns, but with the least risk possible. Most investors take on way more risk than they need, should and many times think they have. When I sit down with folks to give them a free 2nd opinion, it never ceases to amaze me how surprised, scared and angry people often get when they see their risk level.
Even though this year is starting off with a correction, it appears to be just a little scare to help bring investor optimism down a couple of notches and not "the big one" we need to worry about later this year. Use this weakness to buy stocks.
Buy Apple (NASDAQ:AAPL), which has been literally hammered, but is in a good position for 2 reasons: 1 is that it just signed a deal with China Mobile (NYSE:CHL) to allow iPhones to be sold in China which won't show up on the bottom line for a while and 2 that the 5S was not enough of an upgrade to lure in the IPhone 5 holders, but the next one will. They make sure of that by installing a battery that conveniently dies faster once a new phone is out.
Investors should also snap up the powerful growth names like Google (NASDAQ:GOOG) which is leading the technology war and has something up its sleeves with its secret new building in San Francisco. Selected social media companies like Twitter (NYSE:TWTR), now that it has come back to earth. Its quickly expanding user base is sure to make it a must use platform for everybody. Facebook (NASDAQ:FB) is winning over the older crowd, the very people with money and will not be upset by their ads. You can also simply buy the market ETFs like spy and QQQ and SPY. avoid the metals like GLD. With the Fed on the path to less stimulus, gold will continue to get knocked around.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.