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A new year is upon us.  The investing magazines on the news stands are
all touting "How to beat the Street in 2006!"  This is my take on all
that, though what I'm trying for is just a respectable return.  I hope
this commentary would be worth a subscription.  As some of you know, I
"Will work for food", and some of you feed me well.

Bonds:
In a rising interest rate environment, as we have, what bond funds gain
in better returns on new positions they surrender in declining principal
of existing holdings.  They are no better investment than their
typically very modest returns.  An exception could be made for someone
already retired with enough capital to buy the bonds themselves, held to
maturity and returning enough income to meet daily expenses, IF there's
enough extra for equity investing to account for inflation to come.  It
may be moderate now, but don't count on that!

Personally, I don't have an investment in bonds--your mileage may vary.
If I had to have some, they'd be short-term funds that pay less but lose
less principal.  Remember, we saw a few years ago that even modest
returns can sometimes soundly beat the Market.

Equities:
For the typical investor mutual funds should make the core of their long
term holdings.  They are mine, but were I younger and employed I think
it would be reasonable to have a brokerage account with 10-15% of those
assets for "messing around", purely for educational purposes.  ;-)  Mine
are at Vanguard.  I like the low expenses.  They're "no-load" (NEVER buy
a loaded fund!).  Indexing may not be exciting, but I know what I'm
getting, and even their managed funds are "conservative".

What I do is try to match my allocation of funds to the probable future
of the economy.  I use the Morningstar 9-box of Large, Medium and Small
Cap, and Growth, Blend and Value, to target my allocation.  Starting
with thirds for the total of each row and column, and multiplying, one
gets 1/9th in each box.  Then it's necessary to understand how those
categories should fare for a particular economic state.  I change the
allocations until I get something that reflects my general expectations,
and some of those boxes might have zeroes.  Then I select diversified or
index funds within my mutual fund family that are best described as
participating in each particular segment, i.e. box, using Morningstar at
the local library.  At Vanguard it isn't hard.  For actively managed
funds I'd pay a lot of attention to the manager's record.

I liken Large-Cap companies, hence their funds, to "ocean-liners":
comfortable at sea because they're big but therefore not maneuverable.
They have momentum and it takes a while to get them started, stopped or
change direction.  Mid-Cap are like "ferries": not particularly fast,
but much more maneuverable and not for the "high seas" because they are
smaller and can be "tossed around".  Small-Cap are the
"speed boats":
fast AND maneuverable but very limited in "carrying capacity", easily
swamped and not for any sea-state.  Some small-cap companies will
actually benefit by a "storm", and many others will be unaffected by
conditions.

Likewise, on the other axis, Growth companies, and their funds, do well
in a stable, positive economy.  They're the "Go-Go" beneficiaries of a
long-term "secular Bull Market" such as we had from 1982-2000, and
everybody knows their names: Microsoft, Intel, GE, et al.  I call Value
Funds the "dumpster divers".  They jump in the refuse of the Street and
sort out the true trash from the "unloved" but still viable and valuable
companies with better days ahead.  Blend funds do some of both.  It's a
bit harder to have either Blend or Value funds without some active
management--somebody needs to sort out the trash from the "recycling".
Index-500 is an exception, unless you consider the S&P's selection
process a form of active management, because the Street won't always
love everything on the S&P index, but there's no trash there.  That goes
for many of the selected indices, except for total index funds that own
"the good, the bad, & the ugly."

Expectations & Allocations:
Generally I tend to underweight Mid-Caps, although they have been doing
well this year.  There are relatively fewer times when either Large-Cap
or Small-Cap aren't more advantaged.  Mid-cap can be a hedge against
being entirely wrong, but if I am it will be a while before that's clear
and I can just switch my allocation in 3-6 months without annoying
Vanguard.

As I've written here many times before, I certainly don't see another
Bull Market as we once knew ahead.  I see a wide variety of problems,
not to mention the Fed being "unaccomodative" with monetary policy.  So
I would also underweight Growth and Large-Cap in favor of Value and
Small-Cap.  But I'd stay diversified--there'd be no more than 3-4 zeroes
in those 9 boxes, and there sometimes might be particular reasons to
leave something in a particular fund, even if it was minimal.

This exposition would be particularly relevant to one's IRA or 401K/403B
investments.  Now, if I were employed and making payroll contributions,
I would have those deposited to a short-term money-market fund.  Then
every 3-6 months I'd redistribute the accumulated funds so to keep my
allocation precentages in line, i.e. in the funds that have appreciated
less.  In this way I'd be buying cheap and letting the winners run.

"Your mileage may vary":
Remember, nobody has a crystal ball, not even me, and especially those
magazine guru's who seem so sure of themselves.  So mid-year I'd look at
it again, assess the state of the economy and how my allocation has
done.  We can never neglect our investments!

I'll leave further details to you, but you should be able to work
something out from there as I would.  Maybe you're not at Vanguard, and
this isn't a recommendation, because American Century & T Rowe Price are
also largely no-load fund families with different offerings.  But I
think you'd have to agree, my approach here is one that doesn't take an
excessive amount of work.  With decent evaluations of the economy, the
funds and one's own choices, it should provide a decent relative return.
Be sure to compare apples to apples--consider the risk as well as the
return.


Now, as to today's action, prices sank all day, ending about -90% of the
way to a significant loss.  But although volume increased, it was still
-26% below average.

Remember I suggested doing your tax-loss selling a couple weeks ago.
This week that's what Main Street is doing, and it doesn't take much on
a low volume day to change prices a lot.  Volume is likely to stay low
all week.  Main Street just doesn't compete with Wall Street when it
comes to trading volume.

 Price    Vola-    Momen-   Volume   Oscil-   Summ.
 Change   tility   tum               lator    Index
 -__+     -__+     -__+     -__+     -__+     -__+

 _<__     <___     __|_     _|__     _<__     __|_     12/20
 __<_     <___     __|_     _|__     _<__     __|_     12/21
 __|_     <___     __|_     _|__     __|_     __|_     12/22
 __>_     |___     __|_     _     __|_     12/23
 _<__     |___     __|_     <___     _|__     __|_     12/27

Timing Signals:  I don't use or recommend timing signals, but they're
fun to watch.  If I did though, well, I might use something like this.
(Be warned!!  It tends to whipsaw around signal points!)

Last Signal: BUY        Date:  10/31/05 S&P:    1207
Winner or Loser:  tbd                   By:     tbd

See my market tracking charts for '03-'04 and my investment strategy
study at my website(s):
http://www.xprt.net/~pgrogers/Pers.html
http://www.geocities.com/paulgrogers/Pers.html




Paul Rogers, paulgrogers{at}yahoo.com                       -o)
http://www.angelfire.com/or/paulrogers                   /\\
Rogers' Second Law: Everything you do communicates.     _\_V

... Don't sweat petty things, or pet sweaty things.
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