Happy New Year Outsiders!
It’s that time where all of the financial analysts, money columnists, and television talking heads start making their big-time predictions for what is going to happen this year.
I have very mixed feelings about predictions, but I’ll offer you one that I am totally comfortable making: at least half of all predictions will be dead wrong.
Even a broken clock is right twice a day…
Of course, you never hear about it because the “experts” simply point to the one or two things they “called” and conveniently sweep the rest under the rug of history.
The problem is that there are no easy answers when you start trying to predict something a year in advance. If you believe anyone that tells you they can predict the future, I have some lakefront property in Siberia I’d be happy to sell you. In all honesty, I can barely predict what will happen tomorrow, much less the next 12 months.
There are simply too many variables: Fed action, global turmoil, oil prices, inflation… the list goes on and on.
But, that being said, there is one thing we can most certainly predict: There will be volatility.
In fact, it has already begun…
The VIX (S&P Volatility Index) took off running in late December and has continued to climb into the beginning of 2015. CNN’s Fear and Greed Index is now in the red and approaching “Extreme Fear”.
Now — while we’re talking New Year’s — if anyone was unfortunate enough to suffer through the painfully awkward exchanges from Anderson Cooper and Kathy Griffin on New Year’s Eve, I wouldn’t blame you for haranguing me about using a CNN indicator. But in all fairness, it’s a pretty good marker for the market overall. The index doesn’t just track stocks, it looks at seven unique indicators in about every major area of economics and investing:
- Stock Price Momentum: The S&P 500 (SPX) versus its 125-day moving average.
- Stock Price Strength: The number of stocks hitting 52-week highs and lows on the New York Stock Exchange.
- Stock Price Breadth: The volume of shares trading in stocks on the rise versus those declining.
- Put and Call Options: The put/call ratio, which compares the trading volume of bullish call options relative to the trading volume of bearish put options.
- Junk Bond Demand: The spread between yields on investment grade bonds and junk bonds.
- Market Volatility: The VIX (VIX), which measures volatility.
- Safe Haven Demand: The difference in returns for stocks versus Treasuries.
One year ago, this index was lit up bright green as investors plowed record amounts of cash into the stock market. In fact, even a month ago we were firmly in greed territory — another reason why trying to time the market from month to month is a fool’s errand.
So instead of looking into the future, I tend to rely on the past. I’ve seen what has worked over the past hundred years and place my bets accordingly.
Looking toward the future while reflecting on the past in New Year’s in a nutshell. That being said, here are three safe places to put your money in 2015 — the year of volatility…
1) Utilities
Utilities are the most boring stocks in the world. They’d admit as much.
These companies aren’t coming up with blockbuster pharmaceuticals, moonshot technologies, or massive discoveries of silver and gold deposits that will send their stock doubling in a matter of weeks.
But in the face of market volatility, that’s a damn good thing.
You see, utilities are steady through good times and bad. If the stock market tanks and the economy starts receding, people still pay their gas, water, and electric bills before anything else.
Not only are these stocks strong and steady, but you can actually pull some great returns from the utility sector. In fact, the utilities sector quietly returned one of the best performances of the past year, returning 30% as the S&P returned a measly 8% or so.
All the while, the utilities sector didn’t whipsaw around — it steadily kept sending money to investors.
So if you want to fight against volatility and invest in an ironclad business, you can pick one of the major U.S utility players like Duke Energy (NYSE: DUK), Dominion Resources (NYSE: D), or Edison International (NYSE: EIX).
But if you want broader exposure, I’d go with a low-risk utility ETF like:
iShares U.S. Utilities ETF (NYSE: IDU)
This ETF tracks the Dow Jones U.S. Utilities Index, with major holdings like Duke, Dominion, The Southern Company and Exelon. It’s up 24% over the past year.
It also offers a solid 2.84% yield.
ProShares Ultra Utilities (NYSE: UPW)
This ProShares ETF also tracks the daily performance of the Dow Jones U.S. Utilities Index — but returns you twice as much. So if you aren’t satisfied with the slow and steady performance of U.S. utilities, this ETF will return you double — so while IDU returned that 24%, UPW returned 56%
Plus, it provides a decent 1.55% yield that you can add as a safe income stream.
And while we’re talking about safe dividend-paying stocks…
2) Dividend Aristocrats
You know as well as I do that all stocks are not created equal, and very, very few are solid enough to hold indefinitely — especially during times of market turmoil and uncertainly. And we’re staring down that double-barrel shotgun right now…
So what makes a stock worth holding forever?
Much like a marriage, there isn’t a stock out there that won’t go through ups and downs: infighting, restructuring, splits, spin-offs, etc. But there are some stocks that you are better off sticking with “through good times and bad, through sickness and in health…”
In my opinion, those stocks are the mighty “Dividend Aristocrats.”
The “Dividend Aristocrats Index” is comprised of S&P 500 companies that have raised their dividend each and every year for at least 25 years. The Index is split across 10 business sectors and highlight the ones that have been profitable enough over two-plus decades to reward their investors with ever-increasing dividend payouts.
The list is chock full of the usual suspects: Coca-Cola Co (NYSE: KO), Exxon Mobil Corp (NYSE: XOM), and Wal-Mart Stores (NYSE: WMT) to name a few. All of those companies have been no-brainers over the long haul.
These are all great additions to a long-term dividend portfolio.
But it’s never a good idea to sink a ton of money into one particular blue chip in one fell swoop. I choose to dollar cost average these long-term positions.
It’s a way for investors to ease into the market without having to predict exactly where the bottom is. After all, bottoms are impossibly hard to spot. Dollar cost averaging is a really simple strategy if you can keep your cool and ride out the storms. However, it does require a plan and the stomach to stick to it — especially if the markets continue to drop.
That’s because the plan involves buying a fixed dollar amount of a particular stock, fund, or index on a regular schedule regardless of its price. That is usually where most retail investors generally fail because to a large extent they have it all backwards — they love buying the hype and selling the fear.
Even still, dollar cost averaging does make sense even though it often involves overcoming those same fears as stocks “go on sale”.
The reason for this is simple. Using dollar cost averaging, more shares are purchased when prices are low, and fewer shares are bought when prices are high. The end result is that over time the average cost of your shares will become smaller and smaller.
Since dollar cost averaging spreads out your stock purchases, it lessens the risk that you will buy them “at the wrong time.”
Instead, you arrive at an average price that typically reflects the true value of those shares. So if there are some companies that you want to hold forever, pick a few and stick to your guns.
But if you don’t want to track dozens of stocks, you can go the ETF route with Aristocrats as well with the Vanguard Dividend Appreciation ETF (NASDAQ: VIG).
It actually takes the Dividend Aristocrat model and opens it up even more. While the S&P 500 Dividend Aristocrat Index is the pinnacle of dividend-paying companies, there are many other very consistent yearly dividend increases coming from other companies.
Using a similar index but with a 10-year instead of a 25-year track record opens up a way to increase the overall yield by reducing the expense ratio.
But even the most solid stock-based portfolio is still vulnerable to the wild swings of the market. That’s why you need to keep a hedge or two in your back pocket…
3) Precious Metals
One prediction I’m perfectly comfortable making is that precious metals simply cannot go much lower — or any lower. Frankly, it was a bloodbath for precious metals this year, which is why they make not only the perfect hedge against turmoil, inflation, and a falling dollar, but also a perfect entry point for serious returns.
While gold has plenty to offer, at times like these I turn to silver.
If you stayed in silver all the way through 2014, you would have lost 30%.
It’s even worse over the past two years. The S&P is up a whopping 46% while good old silver was massacred by 54%.
That makes my mouth water…
We could very well be testing a bottom for silver prices right now. One indication of this is the historical cycle in which silver has peaked, crashed, bottomed, then began rising again. If you look at the last four cycles, silver rode a very similar wave. Just check out this chart from Gary Christenson:
Since we are looking at history today, instead of predicting the future, we can see that 2015 will be the year that silver starts ramping back up and may hit new highs in 2016. So go ahead and kill two birds with one stone: hedge yourself with silver and reap the profits once the trend plays out a year from now.
So, there you have it: three ways to protect and grow your money for the new year. No crystal balls, tarot cards, or astrological charts. Just good old fashioned history and market sense.
Here’s to another banner year for Outsider Club. I raise a toast to you all.
