The Ignorant Investor

Among media outlets, the week after Christmas is typically slow on news and big on year-end wrap ups. I don't want to follow the crowd on this blog -- I long for originality- but the sad reality is that I'm no less lazy in my own modest, slow-witted manner than the mainstream journalists are in their pretentious but equally slow-witted manner. So guess what? I'm doing a end-of-year piece just like everyone else.

Luckily, I don't need 10,000 words and a big color photo spread to do the job like they do. Last January 12, I went into Yahoo Finance and used its portfolio tool to set up benchmarks using Exchange Traded Funds (essentially index funds that can be traded like stocks). I don't have full coverage of every sector, but I covered the major ones during the year.

The sectors/ETFs that had the highest gains since January 12 included the Energy Sector, which basically kicked ass with a 40% rise. So if you own oil, and I do, you had at least something to cheer about come Christmas time. Other good sectors this year were Gold (GLD up more than 20%), Mid-Cap stocks (VO up almost 18%), international stocks (EFA up over 14%), REITs (VNQ up 14%), and small caps (IJR up 13%).

The broad market ETFs, represented in my benchmark list by the S&P 500 and Vanguard's Total Market ETF were up about 6% and 7%, respectively. The Dow stocks, represented by Diamond ETFs, lagged like a decrepit old pickup truck chugging up a steep Vermont hillside, turning in a gain of only about 1.5% (with dividends included it goes up to around 3.2%). The much talked about tech sector, always expected to come charging back by any analyst on CNBC, pretty much tracked the S&P for the year. Nobody appears to have a good explanation for why the Dow average and other big cap averages, including techs, aren't keeping up with the smaller issues. The profits are there, the cash is there. The market just seems ready to pay a bit more to own smaller issuers. Could the presumably larger pension and healthcare costs for big companies be a factor here as companies expect a continued threat to profits as workers age?

Multiples on the broad indexes are running about their historical averages, and Mr. Market seems to be hesitating about moving them higher. It's not that he's completely depressed about the new year- he still has his hopes. But he's worried about the steam going out of the housing boom and the negative savings rate and a new Fed chairman, so he's kind of hedging his bets right now. I get the sense that there are a ton of managers out there who are worried about missing a big run-up even if they don't like the fundamentals, and what that tells me is that they'll get nervous and bail out on positions the second they think there's a sustained downturn and then jump back in when they think there's movement back up. That might make for some white knuckle moments as volatility increases in 2006.

The talk I see by money managers in the papers is all about strong corporate profits and strong GDP growth and rising productivity. If any one of those measures don't turn in strong gains during 2006, I suspect we'll see some sharp declines in the averages. But we won't see a desperate panic unless corporate profits plummet or Wall Street starts seeing massive inflation underneath the rosy projections of the Administration and the CNBC crowd.

Bonds had a bad year, with the Lehman Index declining about a percent in 2005. I know I should be angry at the bond market for betraying my trust in its steadiness, but with interest rates rising there's not much it can do. If interest rates keep rising, bond funds will continue to get hammered.

That's it. That's the wrap up. A decent year in that a broadly diversfied portfolio didn't get crushed by circumstance, but nothing that's going to start me singing and dancing around in my underwear. I'm working on a plan for next year now. I don't expect it to be a very good plan, but I'm working with my own brain power here. There are limits to what it can do.