2015 Preview: Hard to say "Good Buy"

Healthcare has been golden.

With the change in calendars, short-term speculators will provide countless opinions on what sectors are ripe to benefit the most in the new year.  While short-term investing is not my true interest (despite my market predictions below), there is a benefit to investing before a market increases and the start of a year is as valid of a time as any to identify some of those markets.  If there is an industry with both recent losses and strong long-term prospects (e.g. a solid future), then it may be a better investment opportunity than an industry with recent gains fourfold over the rest of the market.  Even The Motley Fool (no relation) had a year-end article identifying the market's best and worst sectors of 2014.

Performance chasing is a horrible deterrent from long-term growth, yet so many novice investors naturally are lured into the pitfall (and the pitfall is not exclusive to novice investors).  Truthfully, there are valid reasons for “performance chasing” however, such as if an industry previously thought to be wholly unprofitable has proven otherwise.  But expectations of repeated gains at comparable levels should not be held.  To illustrate this point, consider the housing market in 2004, prior to its bubble filling with the hot air of performance chasers.  If real estate had never been viewed as a profitable market previously, then the subsequent years would have proven otherwise.

Gold market fell after 2 great years.

Energy's 2014 decline was in 4Q.

Likewise, also consider gold and precious metals market, which were vastly profitable in 2008 but its market has shown consecutive years of negative returns since then.  If anyone believes that the market itself is no longer viable (i.e. is gold becoming absolutely worthless?), then this downturn could signal the end of the industry as a whole, so it would not be a worthwhile investment. However, if the value of gold is merely decreasing but it will continue to maintain relevance in the future for years to come (i.e., will most value gold in the future?), then it may be a good buying opportunity for a longer range investment.

Granted, these ideas are by no means bulletproof.  For example, I believe the Healthcare industry has outpaced the market as a whole each year for the past 12 years or more.  Is it a bubble about to pop?  Maybe, but if any investors have bearishly avoided Healthcare for the past decade, then there was a substantial amount of profits missed.  About 230% to be exact.

In addition to market sectors, the economies of individual countries could also be considered.  Recently, Money.CNN.com posted a graph* showing the returns from each world economy.  It is worth a look-see.  While my theory would identify Russia as a promising market for 2015, whereas China and Argentina are potentially on the verge of a bubble, there are a lot more geopolitical factors involved in international investing.  While the theory is valid, I would be more bearish on poorly performing economies, but again, the theory still applies and any of those countries could see a reversal in fortunes in the next 12 months.  In this case, the validity of rebalancing become more evident.

CNN trolls are better used
for entertainment than knowledge.

Everyone says to “buy low, sell high,” but so few focus on how to accomplish those two seemingly simple steps.  As illustrated at left, even when a method of how is presented, there is often a public dismissal of the point of view.  For the record, the dissenting opinion presented was flawed: a rebalancing investor would have still benefit from the large cap appreciation, but merely reduced a portion of the portfolio’s exposure to the booming sector (i.e. “sell high”).  Additionally, the rebalancing investor will further benefit either from a future “boom” in small cap stock (buying before the increase) or a quick downturn in large cap (having already sold high).

In reality, no one knows what the markets can do and more often than not, individual years matter little over a lifetime (financially, just as well as personally).  But as I have noted in the past, predicting the forthcoming year is good fun!  While I expected the 2014 markets would clock in above 10%, following the increases in excess of 25% the prior year, it fell just short.  Coming into the last trading day of the year, it could have closed at 10% just as likely as it closed below, falling almost 1% today to close at 17,823 for a modest increase of 7.75% for the year (Nasdaq and S&P 500 increased 13.4% and 11.4%, respectively).

For 2015, there are a few factors involved.  The increases of year after year have to catch up, but the mechanics creating these increases have not really changed.  What I call the "laws of TINA" (There Is No Alternative) still apply, but interest rates are likely to increase during the coming year.  I still expect the Dow to increase this year, but I anticipate only modest gains from the Dow, Nasdaq, and S&P 500).  If the Dow were to increase exactly 10% in 2015, then it would be at 19,606.



* - graph notes:Countries with +/-20%
Argentina - 54.51%
China     - 43.32%            
India - 29.93%
Pakistan - 26.59%
Turkey - 24.61%
Indonesia - 20.24%
Nigeria - (20.67%)
Greece - (26.62%)
Russia - (44.9%)

North America
USA- 12.73%
Canada- 6.9%
Mexico- 0.79%
Brazil - (1.54%)