Asset allocation is a critical component of investing success. Both research and academic studies show asset allocation to be single most significant factor in determining your financial goals. Allocation influences both the total long-term return and risk of your investment portfolio. Other factors such as security selection and market timing account for a very small percentage of your investment returns. Unfortunately, the most important decision to achieving financial success is also the least understood.

What is asset allocation? Most people confuse asset allocation with diversification. They believe it has something to do with making multiple investments among groups of similar assets. Ask investors to list the assets in which they would consider investing. Typical answers include “growth stocks”, “bonds”, “large caps”, and sometimes “international stocks.” But their diversification is limited to selection within one asset. For example, someone choosing to purchase technology stocks may invest in five or six companies - but all within the technology industry. This reduces risk if one of the companies should fail, but is useless when the technology industry (or entire stock market) slumps.

Asset allocation goes beyond diversification to reduce risk across all type of financial assets (cash, stocks, bonds, commodities, real estate, and even venture capital or hedge funds). Investments and risk can be divided further into subcategories of stocks including large-cap, mid-cap, small-cap, value vs. growth, and international vs. domestic. Similarly, bonds can be divided into subcategories of short-term, and long-term, tax-free, high yield, convertible, emerging markets, floating rate, and international vs. domestic. Multiple combinations allow investors to allocate their portfolios into a number of asset classes and categories.

Adding high risk asset classes and investments to a portfolio may seem risky. But combining assets that behave differently, or even opposite to each other, both increases the return and lowers the risk of an entire portfolio. For example, international stocks are considered “riskier” than domestic stocks. Yet, we often see the prices of U.S. stocks go up on the same day prices of international stocks go down — and vice versa. We call this negative correlation. Profits from one asset balance the losses from another. Combining international and U.S. stocks actually lowers investment risk by reducing daily price swings of our entire portfolio.

History demonstrates many markets exhibit similar negative price correlation. In a slumping economy, bonds vastly outperform stocks as interest rates drop. In an overheating economy, inflation helps generate stellar returns in the commodities market. But timing such events is unpredictable, and the variability of returns represents risk to any investor. Choosing to purchase only stocks, only bonds, or any single asset class increases the risk of losing money if that market underperforms.

The power of asset allocation comes from reducing risk while increasing returns. Reducing risk by combining multiple asset classes, however, is not a simple process. While each asset has its own unique measure of risk, many assets share similar price behavior (their prices go up and down together in any market). Combining such complimentary investments increase the risk of wild changes in price. Trade-offs between asset risk and expected return must also be considered. High yield assets typically experience high volatility, or large changes in price. These assets must be balanced by investments with lower rates of return to protect against large declines in value.

Successful asset allocation requires finding the proper mix of assets to balance reward with an acceptable level of risk. Proper allocation planning requires asset research and investment analysis. Fortunately, tools are available to assist the independent investor. Popular financial websites offers independent investors help with educational links and software to build portfolio allocations based on a survey of financial questions. For advanced investors, many books have been written to painstakingly explain the theory and practice of asset allocation - also called MPT (Modern Portfolio Theory). Casual investors can purchase mutual funds specifically designed to automate asset allocation based on an expected retirement date. Pragmatic investors can explore the many financial planners and advisory services that offer asset allocation portfolios specific to their needs.

Consider your options carefully. Each solution offers its own set of advantages and disadvantages. Pick a style that closely reflects your own. Just how important is asset allocation? It’s the single largest determinant of your long-term financial success.

Tim Olson

TheAssetAdvisor.com
Subscribe to our free newsletter.

Mr. Olson is the editor of The Asset Advisor, a financial investment service providing proven strategies for no-load mutual fund investors. He brings 26 years of education and experience from Stanford University, Ernst & Young, personal wealth management, and venture capital investing.

How can we think about language as we use it in business so that we can use it more effectively?

First, let’s consider the purpose of our language acts in business. Without attempting to make an exhaustive list, we might notice that we use language to:

– make an offer (advertise, market, invite).

– negotiate and affirm agreements (form alliances, close sales).

– make requests (asking for sales, support, partnerships).

It is easy to see that we could not be in business for even one day without making offers, requests, and promises. In fact, this is one of the problems of being in business: We use language so often and so unconsciously that we do not notice whether or not we are being skillful. Indeed, until a problem shows up we may not even realize that skill is possible and needed. Notice, then, that the problems you encounter in your business (or career, or marriage, etc.) are often signals that are inviting you to enter into a more skillful conversation.

This notion of problems as invitations to greater skill is good news so long as we have a way to respond to the invitation. We need to notice enough of the structure of language that we can learn as we speak and listen, just as a golfer might watch a pro’s swing so that s/he can copy it during her/his own game.

These are the distinctions that I’ve found most helpful. Every request, offer, or promise in business or out must have all of these elements in order to be complete. What’s more, each of these elements needs to be aligned with your purpose and must be expressed in a way that connects your reality to the reality of the people with whom you communicate.

-- Speaker, the one who makes the request, offer, or promise.
 -- Listener, the one to whom the request, offer, or promise is made.
 -- Future action, what is being offered, requested, or promised.
 -- Time, when the future action will take place and/or be complete.
 -- Conditions of satisfaction.
 -- Presupposition of competence. Speaker and listener are presupposed to be able to follow through.
 -- Sincerity. Speaker and listener are presupposed to be sincere.
 -- Background of shared obviousness. Speaker and listener share enough mutual unspoken context that they will interpret requests, offers, promises in the same way.
 -- Something missing. The request, offer, or promise addresses a concern, a need, or a possibility that is not currently taken care of.

At first blush, some of these distinctions may seem obvious, even trivial. Yet how often do we make offers in business without really knowing who is listening, hoping that someone will pick up our offer and respond without taking care to make sure that they can hear or that we are speaking in the language of the ones who are likely to hear?

How often do we fail even to be speakers? “My work speaks for itself,” asserts the artist, unable to see that for most listeners a different kind of speaker must deliver the message. “I want to build my business through word-of-mouth,” declares the coach or therapist, unaware that there must be a speaker delivering the message for word-of-mouth to begin.

You are invited to review the distinctions above. Make a study of one or two that seem to you so obvious as to be marginalized in your awareness. Write the names of these “trivial” distinctions on your calendar or carry them in your wallet. See if you can notice where they might be important or missing your own speech and that of others.

Molly Gordon, MCC, is a leading figure in business coaching and personal growth coaching, writer, workshop leader, frequent presenter at live and virtual events worldwide, and an acknowledged expert on niche marketing. Join 12,000 readers of her Authentic Promotion ezine to grow your strong business while you feed your soul, and receive a free 31-page guide, “Principles of Authentic Promotion.”

For years the most noticeable public role for Peter Sutherland as chairman of BP PLC was hosting the company’s annual meeting. But after a string of oil spills, dangerous accidents and an energy-trading scandal at BP, the 60-year-old one-time rugby player has rushed into the scrum.

Last year, the Irish politician and prominent banker forced Chief Executive John Browne to publicly commit to his retirement date. After Lord Browne’s surprise decision last month to leave a year and a half earlier than planned, Mr. Sutherland must now bolster BP’s image and manage the company’s first executive-suite transition in more than a decade.

Despite soaring oil prices its shares rose just 4.5 per cent in 2006, compared with a 36 per cent rise by Exxon Mobil Corp. and 15 per cent at Royal Dutch Shell PLC. Yesterday, the company reported fourth-quarter net income decreased by 22 per cent, in part reflecting lower production and lower natural-gas prices.

BP, meanwhile, faces U.S. criminal probes on multiple fronts — oil spills and corrosion in Alaska; a a refinery explosion in March 2005 which claimed the lives of 15 in Texas; as well as its energy-trading practices, with federal officials alleging BP traders surreptitiously influenced propane markets in 2004. BP refutes this claim and says it is cooperating with investigators on all three inquiries.

Mr. Sutherland’s higher profile also underscores a trend that goes beyond BP: a transition in the boardroom dynamics at many of Europe’s biggest publicly traded companies. Nonexecutive directors here have in the past been criticized for leaving too much decision-making in the hands of powerful executives. Now, many companies are moving to shore up their boards with strong and independent directors.

Up until Shell were shaken by an accounting scandal in 2004, Shell’s British holding company had as its chairman a professor of geology. After the controversy, it employed Jorma Ollila, former chief executive officer of Nokia Corp as chairman. Unilever also appointed an external chairman last month to cap a restructuring at the Anglo-Dutch consumer-goods giant.

The goal of Mr. Sutherland at BP has always been to focus on establishing a “robust” and independent board structure he was quoted as saying in a recent interview. After stints as Ireland’s attorney general and Europe’s competition czar, Peter Sutherland in 1993 was instrumental in taking forward the General Agreement on Tariffs and Trade in Geneva. There, he clinched the Uruguay Round, a pivotal trade agreement that set the stage for today’s World Trade Organization. For a man who has achieved so much it is difficult to forsee where he will find his next challenge.

Hospice patients come to our care after being cut, burned, and poisoned. Surgery, chemotherapy, and radiation treatment are the normative methods of care for most of the patients who enter a life-threatening disease. Hospital staff members are trained to be aggressive about curative care.

Hospice care is a phase of care whereby aggressive treatment is no longer appropriate. Palliative care becomes the norm. Patients have been probed physically, mentally, and emotionally. In many ways, patients may be reluctant to any type of care beyond the experiences that led to his/her doctor sharing that no more can be done.

The purpose of this article is to claim that much more can be done. Our Doctors and Nurses are trained to help patients receive medication that stabilizes and even diminishes pain and suffering physically. Social Workers are trained to help patients and families deal with emotional, practical, and legal issues surrounding loss and grief. Spiritual Counselors help with the integration of emotional well-being and a sense of faith and hope beyond one’s self-awareness.

There are three aspects of the grieving process I wish to mention in this brief article:

* The Heart of Care,

* The Heart of Compassion, and

* An Awakened Heart

Since I am a Spiritual Counselor for Hospice Care, I will take a spiritual approach to grief care.

The Heart of Care

The heart of care centers it’s attention on the needs of the patient who is dying. Any attempt to move a patient away from his/her authentic character becomes a war of wills. As we listen and care for a person just as he/she is, we are allowing a person to die the way he/she lived. Our ability to meet a person in unconditional love will draw out the desire to be fully known by the patient. Here, we are given opportunities to meet him/her in grace and mercy.

Patients are not a disease. Patients are awakening into soul. Mary was a strong-willed person who did not want to die. She had a strong personality. She had many roles she carried out in life, and she wanted to hold on to them all. She was a mother, friend, wife, among many other roles.

About two weeks before Mary died, she shared with me that she became aware of two identities: one was her strong personality and the other was a presence of peace she could not explain. The closer Mary came to her dying, the more she could identify with wanting peace over suffering. This identity with her soul became more appealing to her than living in a body that was failing her. She was awakening into her authentic self.

The Heart of Compassion

A dying patient gives up so much in their dying that he/she is tempted to hold on to what is left in their life. Even if holding on means more pain and suffering, some patients do try to do so. As care givers, we need to be sensitive to this aspect of a patient’s letting go process. A patient needs support and guidance to simply learn to move from letting go (an act of the will) to letting be (getting into harmony with one’s dying). A person offering care will enter into the heart of compassion by giving a patient space to enter into this process of moving from “letting go” to “letting be.”

As a person dies, their personality will give way to their soul. In the process, a heart is broken. This desire to escape a painful body and embrace peace (one’s authentic-self) is complicated by the desire to remain with those he or she has loved. This built up tension creates a path one has to choose inside them that transcends individual and collective conscious awareness. In essence, this is a matter of survival for the soul. This path moves a person’s soul forward.

Funeral services remind us, it is the soul of a person that draw us to face death and not the deceased body. These services serve as a symbol of transition for the loved one who has died and those reflecting on the life of the deceased. A relationship that once was created outside us and in the body of another person no longer applies. Now, relationships with the deceased are internal and completely within us creating an invisible bond forever linking our awareness to a spacial quality within us drawing those left behind deeper into soul.

An Awakened Heart

An awakened heart knows there is more to life than what appears on the surface.

Dying people lead us to this place where eternal relationships are forged into the deepest aspects of our nature. It is our nature to love and feel love. Even grief has the capacity to deepen our sense of sacredness toward those we love.

A year ago, I gave a talk for the National Hospice and Palliative Care Organization in Los Angeles, CA. I was gone about a week. When I returned, my youngest son gave me a big hug. I missed him and he missed me. I could feel him literally fill my heart with love. In a real way, my soul was touched by my son’s soul. An awakened heart knows that this is the heart of relationships.

In the landscape of the soul, what matters in life IS NOT matter. When we begin to look through our eyes and not with them, we enter into a view of life from the perspective of soul. Insight, to see from within, enables us to encounter death with hope, with faith, and with love.

As we grow in our capacity to see from within, we enter into the heart of grief. This emergence into the nature of soul will sustain us through death and into life - eternal. May the Creator of us all give us strength for the journey. Samuel Oliver, author of, “What the Dying Teach Us: Lessons on Living” For more information on this author, http://www.soulandspirit.org

Depression and the minor conditions that come with it sometimes make it hard to meet new people. From paranoia to anxiety, from discomfort to a general sadness, dealing with all of this can be hard. How do you sit down and talk with people when you don’t know what to say, are nervous that you will say the wrong thing, or just think that you are not worth talking to?

The first step towards meeting new people is building a slightly better self-image. Accept that you are worth dealing with people and that people will enjoy talking to you. You also don’t want to over-extend yourself. Decide that you will talk with no more than 3 people that day, that you will only have meaningful interaction with a certain number. That way you are not stressing about how many people you will meet, how many people you will get to know that day.

The next thing to do is find a group that will interest you. A poker night is okay for this, but something a little more structured might be better. A cooking class or a book discussion group would probably be better. That way, you can make sure that you are able to discuss something that you feel comfortable and safe with. Fewer surprises allows you to feel a bit more at ease. By controlling as many elements as possible, you are able to make sure that the experience will be as enjoyable as possible.

Learn to alleviate your depression at http://www.curemydepression.com

Small business networking is absolutely critical to your business success. As a computer consultant you are in the professional services business. This industry is all about relationships and relationships are built through networking.

You will need to make small business networking your priority for the first few months of operations. This is a process that can’t be rushed. You’re not going to go to your first network event and get six clients who all need network upgrades next week. But if you do participate in a small business networking event there’s a good chance that you will come away five or six quality contacts.

Networking For Contacts

Aside from the potential client contacts you make, the beauty of small business networking is that the accountant you struck up a conversation with just happens to have a neighbor who’s brother is looking to network his company’s regional office. Or the dentist you were talking to has a similar business philosophy and would probably be a great client to do business with. These contacts are priceless

Once you make the contact you then have to spend time following up with meetings, proposals and sales calls. But this time is much better spent than chasing down one-shot clients. Though small business networking you make in-roads with people who are, or who can put you in touch with, the steady clients that will support your business long-term.

Don’t expect to walk out of every event with a handful of paying clients. Do expect, however, to generate a bunch of quality leads and referral sources. These referrals and leads are the crux of small business networking.

You need to have a bunch of different leads in your funnel and a lot of different contacts in your funnel at any given time. Some of these will be hotter at different stages and will be ready to move into paying client status at different stages and different dates. Small business networking keeps you in contact with these people throughout their buying phases.

The Bottom Line on Small Business Networking

Client contact and client referrals are what will lead you to long-term, steady clients - The kind of clients that will make your business a success. Getting out and attending small business networking events may appear to be unproductive socializing but the contacts you make will generate an enormous return on your invested time. Start your small business network today - you never know where it will take you.

Copyright MMI-MMVI, Computer Consulting 101 Blog. All Worldwide Rights Reserved. {Attention Publishers: Live hyperlink in author resource box required for copyright compliance}

Joshua Feinberg, co-founder of Computer Consulting 101, helps computer consulting businesses get more steady, high-paying clients. Learn how you can too. Sign-up now for your free access to these field-tested, proven business strategies on the Computer Consulting 101 Blog.

“And when the day comes that we can communicate intelligently with dolphins, they may introduce us to the concept of survival without aggression, and the true joy of living, which at present eludes us. In that circumstance what they have to teach us would be infinitely more valuable than anything we could offer them in exchange.” — Horace Dobbs

First of all, let’s take a look at the rationale behind dolphin jewelry. What makes dolphins so attractive as jewelry motifs? Moreover, what would make them so important as to deserve a second look by jewelry-lovers, especially the socially conscientious?

Well, for one thing — if there is any ocean-dwelling creature that is said to be the smartest and most compassionate - it is the dolphin. Dolphins have been known to guide stranded seafarers to dry land, and converse intelligently in a language that’s all their own. Scientists have been attempting to study the way dolphins communicate, and there is increasing evidence that dolphins have their own complex language. Dolphins are also the only ocean mammals that mate for recreation, and are closest to humans in this respect.

Dolphins are also among the most graceful of sea creatures, moving smoothly and effortlessly through the turbulent waves, turning backflips in the air with all the carefree air of a human child showing off a somersault. After all, who has never felt anything but goodwill and affection for Flipper, that most beloved of all celebrity dolphins?

But there is a sad twist to the dolphins’ story. Believe it or not, some species of dolphins are fast becoming an endangered species. Pierce Brosnan (James Bond 007), Dean Anderson (StarGate, McGyver) and Martin Sheen (West Wing) have been known to support causes that save dolphins from being killed for sport or commercial purposes. Pollution is driving many dolphins to flee their ocean sanctuaries, and there have been stories of dolphins being beached while fleeing desperately from nuclear testing grounds or oil spills.

Wearing dolphin jewelry may not directly save the lives of dolphins, but it will help other people become more aware of the situation surrounding these intelligent creatures. But most importantly, dolphin jewelry continues to be elegant and eye-catching through the years. It represents a serene, fun-loving beauty that perseveres despite harsh trials.

Sam Serio is an Internet Marketer, musician and a writer on the subject of jewelry and gemstones. For more information on jewelry and gemstones, we cordially invite you to visit www.morninglightjewelry.com to pick up your FREE copy of “How To Buy Jewelry And Gemstones Without Being Ripped Off.” This concise, informative special report reveals almost everything you ever wanted to know about jewelry and gemstones, but were afraid to ask. Get your FREE report at www.morninglightjewelry.com.

I can tell you right now that if you settle down with your frame of mind now, you will be entering into a relationship that has nothing but pure pain.

Whenever a group of people get together for a common purpose, a structure must be put in place, or not much happens. A stock investment club is no different. For a stock investment club to be successful there are several features that need to be in place for the club to run smoothly.

There are two broad types of people in the market, investors, and traders. Investors use the market to build a stock investment portfolio that will realize them a profit in the long term. A trader uses the stock market to make money quickly over a short period of time. Members of a stock investment group should consider themselves to be investors, since they will be in the investment market for the long haul.

Because of the long term nature of the stock investments, a club will need to have clear investment goals. All members of the club should have the same philosophy about investing, and be pursuing the same goals. If these goals aren’t made clear, the membership could easily become divided about stock investment decisions, and the effectiveness of the club could suffer.

There should be a clear understanding established of what percentage of the profits realized from the investments are going to be distributed and what percent is going to be reinvested immediately back into the stock market. There should be balance between growth and stability.

But before any stock is purchased or sold, it should be required that all members of the investment club be part of the study of these stocks, and be part of the final decision. The club can use technical or fundament analysis of the market to help make these decisions, whichever fits their investment style best.

Because of this fact, it’s important that all members of the group attend all the meetings. When there are decisions that need to be made about ongoing investments and future stock investments each member needs to be part of the decision process. If the group decision is held up because some members don’t attend regularly, the effectiveness of the stock investment group is jeopardized. Club members should also communicate on a regular basis. Part of the experience of starting a stock investment club is getting together to enjoy similar interests and goals.

It’s a good idea for all members of the club to have Internet access so that they can keep track of the market from their homes, and to make it easier to communicate with other members frequently. The importance of good communication between members of the group can’t be stressed enough.

And last, but certainly not least, there clear records must be kept of all stock investments, profits, losses and any other money issues, that follow accepted accounting guidelines. These records should also be available for any member of the club to read at any time.

If all of these guidelines are met, the members will be confident in their club, and feel secure in their stock investments. This will allow the club to grow, and likely produce profits, as well as market experience, to its members. Without the guidelines, a club will be chaotic and ineffective. And a good way to lose your stock investment.

Let’s face it, you’re on a roll. After getting down to your attorney’s office to sign the new Living Trust and then diligently tracking down your assets to fund the trust, you should be congratulated. You’re one of the responsible ones - 70% of the people who die each year in the United States haven’t even bothered to get a will. Frankly, you’re an inspiration to us all. But to seal the nomination for the financial Oscars, a little work on your investments could go a long way.

Asset Allocation anyone? Does this term sound familiar? It should - financial planners, mutual fund companies, trust companies and stock brokers have drilled this into our heads for the last decade or so. It’s the latest and greatest. (Actually, Harry Markowitz was playing around with this back in the 1950’s but, until the advent of powerful PCs, Modern Portfolio Theory was only used by the big institutional investors).

For the most part, asset allocation also works. As long as we keep it in perspective and understand that our most important investment objective is our “well being” and not some bonehead’s “optimum portfolio allocation”; we’ll be okay. Our money is meant to work for us, not the other way around.

Basically, Asset Allocation divides investments into three major asset classes: Growth, Income, and Cash. Like making spaghetti sauce, combining the ingredients in different ratios is going to give us different results. Ultimately, we will stay with the ratio that suits us best. Don’t worry about the neighbors’ tastes. They can peel their own garlic. Like any good recipe, though, it does help to have some guidelines.

Here’s three common growth allocations:

1. The Aggressive Growth Portfolio - 100% Growth / 0% Income and Cash.

In the short term, these portfolios should come with a warning label. The volatility can upset all but the strongest constitutions. Historically, this is a long-term strategy. If you want to smooth out the ride, time horizons of at least 10 years are often suggested.

Returns over the long term should equate to overall stock market returns. The pattern of return will also reflect the various up and down years of the market.

This should be obvious, but you shouldn’t be looking for much income from this allocation because it’s not going to be there. Sure, you may be able to go into principal for income needs, but growth allocations generally don’t like to be tampered with. If you need income, other allocations will probably suit you better. This portfolio is best for those with a high risk tolerance and a time horizon of some duration.

2. The “Classic” Growth Portfolio - 80% Growth / 20% Income and Cash.

Like the Aggressive Portfolio, this places a high priority on long-term investment growth. It just does it without quite the extreme volatility, which of course is accomplished by adding some bonds and cash to the mix. The time horizon to enjoy the results are also shortened. There may be some give up in overall return, but many people will readily trade return for lessened volatility. Income yield typically can approach 1.5%.

This still isn’t for the meek, but does start to define mainstream investing in the United States.

3. The Balanced Growth Portfolio - 60% Growth / 40% Income and Cash.

This portfolio seeks both long term growth and income. Because the optimum time horizon is cut to 7 years or so, it doesn’t demand a lifetime commitment prior to enjoying its rewards. Again we continue to trade risk for return, but with an average income return of a little over 2%, we begin to shift the focus off pure growth.

For those following the “prudent person” rule, the 60/40 allocation is a favorite. Often seen in trusts, this model can serve both income and principal beneficiaries.

Although other models are allocated toward income, the above models are the major allocations appearing in most financial readings. As guideposts to putting together your portfolio, you should become comfortable with how each of these models operates in determining both risk and return.

Common Sense Investing
By Chip Dahlke, Living Trust Network

Glenn “Chip” Dahlke has 28 years of experience in investing and is a principal of Dahlke Financial Group. He maintains a private investment clientele and is also a Senior Contributor to The Living Trust Network and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

Contact him at dahlkefinancialgroup@sbcglobal.net.

Bullish investors would likely have rather received a lump of coal in their stockings, given the prevailing lofty level of energy prices, than the uncharacteristically lackluster performance delivered them by the stock market in the waning days of 2005. What made the sour ending so unusual was its defiance of the well-documented normal tendency for stocks to rise in December, particularly near the end of the month. December has historically been the strongest month for stocks, posting a gain over 70% of the time, and the traditional “Santa Claus Rally” has swept the S&P higher in the last 2 weeks of the year over 80% of the time since 1950. The trend has remained so potent for so long that since World War I broke out in 1914 the Dow Jones Industrial Average (DJIA) registered its yearly high 20 times between Christmas and New Year’s, on one of the last 6 days of the year. In the period from 1890 to 1913, when railroads were the “blue chips” of the era, the Dow Jones Rail Average or its predecessor, the 20-stock Average, closed at its annual high in the last week of the year 5 times. So blue-chip stocks hit a fresh top for the calendar year in the narrow Dec. 26-31 window over 20% of the time (25 times out of 116).

However, in 2005, most stock indexes topped in early to mid December at their best levels of the bull market that began in October 2002. The venerable Dow, constrained by weakness in component General Motors stock, couldn’t even get that far, instead peaking just below its March 2005 top on the day following Thanksgiving. Then things turned negative. The yield curve (spread between long- and short-term interest rates) inverted after Christmas, with the yield on 2-year Treasury Notes exceeding the rate for 10-year Treasury Bonds. Yield curve inversions have preceded the last 4 U.S. recessions. Blue chip stocks, as measured by the Dow and S&P 500, sagged almost 2% by year-end to finish December at their respective lows for the month. But 2006 ushered in an explosive rally when minutes released from the Federal Reserve’s last meeting suggested that the current round of credit tightenings initiated by the Fed in June 2004 might be nearing completion. The yield curve steepened back into positive territory and investors rejoiced. Already, after just 2 trading sessions, the S&P 500 and S&P 400 MidCap averages recouped all their losses from last month’s closing highs with most other indexes not far behind.

A multi-day cumulative decline in the Dow of greater than 1% through the end of the year (meaning a new closing low for the move on the final day), like we experienced in 2005, is so rare that it never happened before 1966. In 1967 stocks burst out of the gate immediately and the Dow rose 9 days in a row propelled by - you guessed it - favorable interest-rate sentiment. On January 26, 1967, banks cut the prime rate for the first time since 1960. We decided to take look back at stock performance in January following all multi-day cumulative declines in the DJIA of greater than 1% lasting through the end of December to see if this year’s renewed upbeat tone figures to hold up.

1966-67: After a major low in October and subsequent rally, the Dow Industrials slip 4.27% through the last day of December, then jump 8.12% in January. The S&P climbs 7.81%. 1978-79: A much smaller 1.35% year-end decline leads to a January gain of 4.25% in the DJIA and 3.97% in the S&P. The NASDAQ outdoes them both, rising 6.65%.

1982-83: December’s decline: 2.24%. The NASDAQ (+6.86%) beats both the Dow and S&P, with respective gains of 2.79% and 3.31%, by a 2-to-1 margin.

1986-87: A 3.05% dip in December gives way to a full-fledged buying panic. The Dow sets a record with 13 consecutive up days to start the year and ends January 13.82% higher. The S&P and NASDAQ skyrocket 13.18% and 12.54%, respectively.

1993-94: December’s fall (-1.06%) and January’s rise in the S&P (+3.25%) and NASDAQ (+3.05%) are relatively anemic, but the DJIA steals the show with a 5.97% surge.

1996-97: Fairly routine. Dow -1.72% in December, but +5.66% in January; S&P+6.13%, NASDAQ +6.88%.

1998-99: Amid Dot-com mania the DJIA falls 1.5%, then rebounds a mere 1.93%. S&P +4.1%, but NASDAQ’s +14.3% eclipses even the 1987 market.

As you can see, history tells us that the bulls appear to still have room to run this month based on past market response in the aftermath of late-December weakness. Two days into 2006, the DJIA is up 1-1/2% and the S&P 2%. On the heels of a conclusion to the year like we just experienced, January’s average gain in blue-chip stocks amounts to a healthy 6%. Generally, the bigger the slide into year-end, the better. December declines under 1% were omitted, as is a mere single-day drop of just over 1% in the last session of 2001, which led to a further 1% January loss in the bear market year of 2002.

The search for trading patterns that surface around the beginning of the year seems to draw habitual focus from Wall Street pundits. Not all of those discovered have stood the test of time. Let’s examine how well some of the most notable ones have fared.

January Effect

The “January Effect” refers to the propensity for small-company stocks to lead the bullish charge very early in the year. In the past, January has been the second best-performing month in the market. Tax-loss selling in advance of the New Year was often proposed as a possible explanation. No one ever explained why the effect materialized just as strongly in many countries that don’t tax capital gains. The phenomenon was so pronounced and reliable that it started to attract widespread attention in academia. In the late 1980s, a couple of college professors even wrote a book called The Incredible January Effect.

By 1994, small-cap (small capitalization, based on market value of outstanding shares) stocks began a streak of 6 straight years of underperformance relative to their larger counterparts. The Russell 2000, the best-known small-cap index, actually fell in 7 of the last 11 Januarys (1995-2005), underperforming in 5 of the 7 losing years. The Russell managed to both gain and beat the blue chips in only 2 of the last 12 years (2001 and 2004). So far this year, the Russell 2000 is up 2.4%.

Another aspect of the January Effect is the tendency for last year’s beaten-down stocks to shine early in the year at the expense of former winners. So-called “window dressing” by portfolio managers anxious to shed unsightly losers before presenting their year-end reports to clients, as well as a rebound from tax-loss selling has been postulated. The recent record is mixed. In the first week of 1999, cyclical stocks (economically-sensitive industrial companies like Alcoa, GM, Caterpillar, Dupont and USX) roared, outgaining more popular consumer stocks by a ratio of 5-to-1 after a flat 1998. But the red-hot NASDAQ, fresh off a record 1998, picked up where it left off, trouncing the Dow with 5 consecutive new records and a 6.9% weekly gain. Value stocks held up better than growth stocks amid the market’s slide in week 1 of 2000, following an unprecedented massive disparity in favor of growth in 1999 as a whole, a year in which the tech-heavy NASDAQ rocketed a mind-blowing 85.6%. But the NASDAQ collapsed beginning in spring 2000, and lost even more ground to the suddenly less unappealing Dow as 2001 kicked off. At the outset of 2002, though, the beaten-down NASDAQ rebounded with far greater vigor than the Dow or S&P.

Will last year’s laggards step to the fore in early 2006? Not if the action on Tuesday, January 3 provides any indication. General Motors continued its plunge while hot stocks like Apple, Google and energy companies, thanks to a $2 spike in crude oil, surged.

January Barometer

As January goes, so goes the market for the rest of the year, or so the theory goes. And proponents of the “early warning system” claim to foretell January’s direction from its first 5 trading days. Alas, the first 5 days are part of the month and, when factored out, exhibit little if any discernable effect on the remainder. The January Barometer, however, although seemingly susceptible to the same sort of argument, actually boasts a better track record than most human prognosticators. Seventy-five per cent of the time, a winning January foreshadows an up year. But a down month brings further losses in over 60% of instances. Bull market climaxes, significant bear market rally highs and tops leading to prolonged bull market corrections often arrive in January or at the tail end of December. Such events are probably best evaluated on a case-by-case basis.

Small stocks and the last trading day of the year

At one time, secondary stocks could be counted on to invariably rise on the last trading day of the year. What money manager, whose compensation typically depends on performance and assets under management at year-end, would want to cut into profits by selling at the last minute and perhaps knocking down his stocks’ prices? The NASDAQ Composite, once a pretty good proxy for small stocks before rapidly growing big technology companies came to increasingly dominate the index in the 1990s, climbed on the last trading day in every year of its existence from 1971 through 1999, 29 years in a row. Since 2000, it’s fallen 6 straight times. Traders started aggressively bidding up premiums on futures contracts for the Russell 2000 going into the last day each year so that even a relatively robust gain in the underlying index would no longer guarantee a profit. The Russell 2000, along with the S&P 400 MidCap and S&P 600 SmallCap indexes have also fallen to end every year since 2000, save for nominal gains on the last day of 2002. It would seem that readily identifiable seasonal anomalies around the turn of the year are on borrowed time as soon as they draw wide notice.

What’s next for stocks?

There’s little evidence that concern applies to the market’s predilection to shake off year-end weakness in January though, and, in any event, plenty of reasons exist to remain bullish. In a recent article, we explored historical stock market performance in the aftermath of 14 separate October lows. The S&P bottomed on October 13, 2005. Thus far, both the duration and magnitude of the prevailing leg up remain well short of historic norms, leaving plenty of upside potential. We found that post-Thanksgiving ennui like we just experienced is fairly typical following initial thrusts off October lows, but the sluggishness almost never persists beyond early January. The entire advance since 2002 is still rather modest by past bull market standards and, as its reaction to the Fed news demonstrates, the market could be poised to leap like a coiled spring on any unexpected good news after the Dow stayed mired in a tight 10% trading range throughout 2005. This stock market displays much in common with the largely analogous markets of 1945-46 and 1985-86, including limited corrections of less than 8%, as witnessed in April and October of last year. Given the accompanying bullish fundamentals now in place (a stronger bond market, energy prices off their highs), we expect a continued strong advance before a final top or larger corrective decline.