BULLS & BEARS: History suggests market ready to make large run

July 10, 2006

Two weeks ago in this space, I pointed out that investors are close to joining an exclusive club-there are only three previous seven-year periods where an investor lost money in the U.S. stock market.

The last seven-year dry spell was from the start of 1968 through the end of 1974. In that span, $100,000 an investor put to work withered to $90,000. By the end of 1974, inflation, oil-price spikes, an unpopular war and an unpopular president had left investors itchy. There's nothing like war and energy shocks to make the stock market grumpy.

But starting in 1975, the seven-year itch was soon cured by a seven-year run of 14-percent annual returns.

The strong market returns began when most investors had thrown in the towel.

And the strong markets persisted in spite of disillusionment over dirty politics, Jimmy Carter's cardigans, hostages in Iran, a portly Elvis, and Billy Beer.

Investors in 2006 are almost as disgusted with global events, politics and their portfolios.

Today, there are a lot of similarities to three decades ago, except that President Bush's relatives aren't quite as entertaining as those of the peanut farmer.

History might not repeat itself and produce 14-percent annual returns. But if what's happened in the past is any indication, the U.S. stock market should have a strong run over the next few years.

So how can you capitalize? One way to boost returns is to make sure your "beta" is higher than the market's.

What is a "beta" and why should you care?

The beta coefficient was concocted by William Sharpe more than 40 years ago and simply measures a stock's or a portfolio's volatility.

A stock's beta reflects the volatility in the price of a stock in relation to the volatility of the S&P 500.

The S&P 500 has a beta of 1.0, so if your stock is just as volatile as the market, it will also have a beta of 1.0.

If your stock has a beta of 2.0, it is twice as volatile during a broad market move; a stock with a beta of 0.5 would be half as volatile as the market.

Once you know the beta of all your stocks, you can calculate your portfolio's volatility.

You can figure your portfolio's beta with any number of software packages or online sites, such as Value Line or Yahoo Finance.

Or if you use full-service brokers, make them earn their commission and have them do it for you.

In a falling market, a diversified portfolio of stocks with a low beta should suffer less than the market.

Logic would also suggest that a portfolio with a high beta should outperform in a rising market.

You may want to check your beta now, so you're ready if the market begins its run.

With a little luck, the next seven years will boost your bottom line. And if we're really lucky, we'll go full circle and the next president's family will be a little kookier.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
Source: XMLAr03400.xml
ADVERTISEMENT

Recent Articles by Dave Gilreath

Comments powered by Disqus