Jan. 9, 2006 - Whither the Market in 2006?

It happens at every social gathering I attend.  At some point, someone asks me what I think the stock market is going to do.  This scenario was replayed several times during the recent Christmas season.

As usual, my inquiring acquaintances were disappointed to learn that I -- contrary to popular opinion -- do not own a crystal ball.  I'm glad they asked the question, however, because it provided a teaching moment that may save them some time and money someday.

Pay attention!  It may save you too.

It is natural for us to want to know the future, especially when it comes to our money.  Wouldn't you like to know what the stock market is going to do so that you could profit from it?  If only we could discern the "secret" to unlock vast treasures of wealth for our benefit.  Any little tidbit or insight will suffice -- something to give us an edge over other investors.

Such a "secret" does not exist anymore than pots of gold at the end of rainbows.

Yet people will scour reams of data, concoct elaborate theories, and invoke some of the goofiest superstitions imaginable -- and bet their financial futures on the outcome -- all in the name of discovering the "holy grail" of investing.

What you will quickly find when discerning the market tea leaves, however, is that two people can look at the same data or situation and draw opposite conclusions.  For example, below are 2 articles from January 1st which look ahead to the market's direction for the coming month and year.  Check out the headlines:

• "Stars May Be Aligned for Jan. Stock Rally" by Michael Martinez, AP

• "Are Bears Roaming Broad & Wall?" by Emily Chasan, Reuters

Both writers draw from similar historical information and discuss the same upcoming events, but paint very different pictures for 2006.  Who is right?

It depends on whom you want to believe.

Optimists subscribe to the rosy scenario and pessimists gravitate to the bleak scenario.  Both present rational cases for their views.  So which one are you?

It doesn't really matter.  The market will do what it's going to do whether or not you're an optimist or pessimist.

Rather than worry about the market direction or enter into endless debates between optimists and pessimists, I have found the following to be reliable guidelines for investing:

1.  Select investments appropriate for your goals and time horizon.

2.  Don't make changes based on a whim.

3.  Stay within your tolerance for risk.

4.  Diversify, diversify, diversify.

5.  Rebalance your portfolio periodically.

Not everyone agrees with such an approach.  There are those who insist the "holy grail" of investing is out there.  Some even claim to have found it.  But those claims are a little dubious since these same folks appear to make more money from selling us their ideas rather than from simply investing based on their ideas.  

To paraphrase one of Wall Street's most respected figures, Burton Malkiel, picking the next hot stock is like finding a needle in a haystack -- so just buy the haystack.

That goes not only for picking the next hot stock, but also for discerning the next investment fad, playing a "secret" formula or method, or trying to "time" the market.  They're all needles in the haystack.

What counts is how you build the haystack, not finding the needle.

No matter what you do, best wishes to you and your investments in 2006!