The Better Inve...'s  Instablog

Valentine's Day is just around the corner, and the thoughts of many turn to love. It is, therefore, a good time to bring out one of the timeless admonitions of investing: don't fall in love with the stocks or the funds in your portfolio. It will only bring you heartache.

It is easy to see how people can fall in love with the objects of their investment portfolios. In the finance textbooks, assets are abstract notions - things called XYZ Company or simply Asset A or B. They have a value we can compute from their financial statements and forward-looking business prospects, and that is all well and good. But in the real world, assets are much more than those abstract notions - they represent the products and brands that resonate with us emotionally. For many of us, the first notion we had of the existence of business companies came in the form of the products near and dear to us in childhood - Disney films, Mattel Barbies, Lionel train sets and so on. That emotional attachment does not disappear when we reach adulthood - think of the devotion so many people have to their iPhones and iPads, and the brilliant stagecraft orchestrated by the late Steve Jobs with every new product launch or even routine upgrade.

Of course, there is nothing wrong with being passionate about great products - the problems start when that passion is transferred to the stocks of these beloved companies. There are only two valid reasons for having an asset in your portfolio: first because it is suitable for your long term objectives and level of risk tolerance, and second because it fits well with other assets to contribute to a well-diversified portfolio. That goes for individual stocks, and also for funds. Love should have nothing to do with it.

It may seem less likely to fall in love with a fund than with a stock - after all "Black Rock Large Cap Value Fund" or "Calamos Market Neutral Fund" does not exactly trip off the tongue in the manner of Apple or Google. Still, it happens - often when a fund gets onto a "hot streak" of consecutive months or quarters of outperformance versus a benchmark. The object of love in this case is not a sexy brand but a fund management team. We accord these individuals the kind of accolades usually reserved for major league sluggers or NBA mavens with a hot hand for the three-point conversion. What is easy to forget is that "hot streaks" are generally poor indicators of long term performance. In fact, many studies over the years have supplied evidence that mutual fund investors on average significantly underperform broad market benchmarks, largely because they tend to buy funds when a hot streak is already well under way, and thus are more likely than not to underperform when prices retreat from momentum highs, as is so often the case.

At the high school prom, the popular kids are surrounded by would-be suitors, while the less socially adept forlornly line the walls. In the investment world, there are a number of savvy investors who know that it is the wallflowers who often hold the best prospects for long term happiness. These are the value stock funds - investing in the companies nobody has ever heard of, who supply products or services to markets most people probably don't even know exist. These companies may not be buying up snazzy 30-second spots during the Super Bowl, but a close and detailed study of their business models may reveal that their stocks are trading at a significant discount to the total potential value of all their assets and net future cash flows. The fund managers who methodically invest in these assets over time are more likely to be happy in the long term, even if they never turn heads or generate excited gossip on the cocktail party circuit as the next can't-miss investment.

Love has its place. Say it with chocolates or roses, and keep it away from your investment decision making.

Have you ever fallen in love with a stock or a fund? Tell us what you think.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The housing and construction industries play a large and influential role in the US economy. The American Dream, after all, was built around the notion of home ownership and this has resonated as an economic priority for many generations now. To a large extent, the recovery following the 2001-02 recession was driven by housing, and the industry was certainly at the heart of the economic collapse of 2008-09. It is important for investors to know what is going on in the housing industry, and for that purpose, we focus here on a handful of useful key data points.

To get a good picture of activity in the housing market, we need to know several things. First, we want to know how many people are buying houses -either first-time buyers or moving from their current home to a new one. This gives an overall picture of demand, and it is captured by a metric called the Existing Home Sales report, put out monthly by the National Association of Realtors (NAR). Your home purchase falls under this statistic if you buy a home that has been put on the market for sale. The total number of existing homes available on the market is referred to as the housing inventory, and this is another important number released by the NAR. A large build-up of housing inventory can mean that sales are moving slowly and prices are soft. In their most recent press release, the NAR noted that existing home sales for year-end 2011 increased by about 5% to a seasonally adjusted rate of 4.6 million units, and housing inventory had fallen to 2.4 million units from a record of 4 million in July 2007. Those numbers indicate a possible bottoming out of the soft conditions we have seen since the 2008 crisis.

The inventory data also give some context to another important indicator - new housing starts. Homebuilders tend to break ground on new developments when demand is strong and existing home inventories are low. The New Housing Starts number is released every month by the US Commerce Department. It is regarded as an important leading indicator of economic activity. Homebuilding is a very productive sector of the economy - it requires construction materials and direct labor, and also will likely give a boost to home furnishings and related markets. The latest Commerce Department report shows that 679,000 permits were issued in December 2011 to begin housing construction, which was up 7.8% from the comparable figure in December 2010 - again, a potentially upbeat market indicator.

Of course, all homeowners want to know what is happening with housing prices. The Case-Shiller Housing Price index, issued every month by Standard & Poor's, provides average nationwide home prices, as well as regional prices. One of the main economic characteristics of the housing industry is locality - the economic characteristics of demand and average prices vary considerably from region to region.

Much of the housing news we have listened to over the past several years has focused on foreclosure activities. Record numbers of home foreclosures followed the market collapse in 2008, and while this too appears to have found some degree of firmer footing, it continues to be a problem, particularly in the more depressed markets that have been lagging the slow-paced overall economic recovery. It is important for investors to know how many homes are in foreclosure and what percentage of overall home sales come from foreclosures. Foreclosure sales tend to be more complicated than regular home sales and prices tend to be lower, often significantly so. In the most recent data available from the RealtyTrac US Foreclosure Sales Report, for the 3rd quarter of 2011, 20% of all nationwide home sales were related to foreclosures, though this was down from about 22% in the previous quarter. About 1.5 million homes nationwide are on the market through foreclosure activity.

As the US economy moves gingerly along in its nascent recovery, the progress of the housing industry will continue to be an important contributing factor. Knowing what data points to look for can help investors make better sense of how the year is shaping up.

Tell us…Where do you think the US housing market is headed?

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Predicting the performance of the stock market, especially as of late, has been a near impossible task. One day, stocks are soaring, the next they're plummeting. You can forgive investors for feeling dizzy as 2012 rolls in.

But 2012 is also a presidential election year, and so inevitably the experts are asking "Do election politics play a role in whether stocks rise or fall?"

Marshall Nickles, writing for Pepperdine University's Graziado Business Review, takes a close look at this question, analyzing the performance of the Standard & Poor's 500 Index from 1942 through 2002.

Nickles found that, generally, the stock market goes through a full cycle of ups and downs every four years. During these periods, stock market low points tend to occur close to mid-term Congressional elections, while stock market high points usually hit closer to the presidential election.

This would seem to bode well for the stock market's performance in 2012. After all, this year will see a presidential election. Historically, stocks should rise.

Unfortunately, that hasn't been the case lately.

Writing for Kiplinger, columnist Steven Goldberg notes that new presidents tend to make difficult economic decisions during the first two years of their presidencies. This often leads to a stock market that falls in value during this time.

As presidents start to look toward re-election, starting in the third year of their terms, they often resort to doing whatever they can to boost the country's economy, Goldberg writes. Consider it an effort on the part of presidents to retain their jobs or to help their political parties maintain power. When this happens, stocks, not surprisingly, go up.

Goldberg cites some interesting numbers to back this up: since 1940, the Standard & Poor's 500 Index returned on average a cumulative 9.3% during the first two years of a president's term. In the second two years, the index boasted on average a far healthier cumulative return of 25%.

This pattern, though, has not been consistent of late. The term of George W. Bush saw the stock market fall 37% in 2008, the last year of his presidency. This came after the market actually rose in value during the first two years after his 2004 re-election.

Pres. Barack Obama has bucked the trend, too. In 2009, the first year of Obama's term, the stock market rose 26%. In the second year of his term, it rose 6.2%. In 2011, though, the performance of the stock market was flat, with the Standard & Poor's 500 rising in value by only 0.1%.

What does that mean for 2012? The honest answer is that it is anybody's guess. Using presidential elections to predict the performance of the stock market is in my view unlikely to help investors navigate today's uncertain and volatile global economy, especially given the impact that Europe continues to have on our domestic markets.

Similarly, it's also difficult to predict the performance of stocks after the presidential election is over. That's largely because the president doesn't have all that much control over how stocks perform. Too many factors outside the president's control have much larger impacts on stocks - wars, recessions, housing crises, debt crises overseas.

There is one myth, though, that USA Today has busted: despite their largely pro-business platforms, Republican presidents are not necessarily better for the stock market. USA Today writer Adam Shell cited data from the Stock Trader's Almanac saying that the Dow Jones industrials have actually posted larger average returns under Democratic presidents than they have under Republican ones.

Of course, too much store can't be placed in the numbers alone. Much depends on what was happening in the country and the global economy during the terms of those Republican and Democratic presidents. Again, outside factors will exert a far greater influence on stocks than will the person occupying the Oval Office.

Tell Us: Who do you think will win the election and what will their effect be on the markets?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.