The Halftime Report 2005
Bull markets continue to roar around most parts of the world. For two and a half years now, the market has recovered dramatically from the long bear market stemming from the technology bust. For 2005, it has simply been a continuation of rising markets.
A walk through the world markets
According to the MSCI, if we look at 23 of the developed markets, the top performing markets in the first six months of 2005 were led by Europe. In fact, nine of the top ten world markets came from Europe. The best performing market in the first 6 months was Austria with a 19.37% return. Next was Denmark with an 18.64% return and rounding out the top three was Norway at 17.65%. Finland, Netherlands, Sweden, France and Greece all posted double digit returns.
Canada finished mid pack in 10th place with a respectable 7.79% return. Only 2 countries posted negative returns. Portugal was at the bottom of the list with a 3.25% loss and the US finished with the other loss of 1.31%.
It’s no real surprise but Energy was the strongest sub-sector in Canada with a 32.7% return in the first 6 months of the year. The next best returns came from the Real Estate sub-sector with an 18.8% return. At the other end of the spectrum, only four out of 16 sub-sectors in Canada posted losses in the first half of the year. Technology was the worst sector to be in with a 14.7% loss. What is interesting is 1 year ago, technology lead the Canadian market with a positive 44.6% return. What a difference 1 year makes, especially when it comes to volatile sectors like technology. Also in the red were Health Care (-9.7%), Materials (-4.6%) and Gold (-3.5%).
Mutual Funds continue to attract money
2004 was a stellar year for the mutual fund industry taking in $14.7 billion dollars in sales. This year, the trend continues and investors continue to grow the mutual fund industry to its highest level at $527 billion.
Investors probably continue to invest in mutual funds because they continue to perform along with the markets. The top five categories for the first half of 2005 were Natural Resources. Emerging Markets, Income Trusts, Real Estate and Dividend Funds. Generally, these five categories have dominated the top 10 lists for the last 5 years.
At the other end of the spectrum there were 4 mutual fund categories that lost money. This list included Foreign Bonds, Science and Tech, Japan and Precious Metals.
Five lessons from the halftime report
I’ve now been writing the halftime report for five years. My standard disclaimer for the halftime report has not changed: “The past is the past and it does not tell us what is in store for the future”. So what does the halftime report really tell us? Here are some of my thoughts about the halftime report:
- The majority of investors will probably chase the best performing investments. After all it is human nature to seek winners as opposed to losers. While it may seem intuitive to buy more winners and sell the losers, remember that everything goes in cycles and typically the winners become the losers and the losers become the winners.
- Everything mentioned in the halftime report is likely to be risky. It’s a simple law of investing. In order to get to the top or bottom of any list, it requires a higher level of risk. If you are a conservative investor, you should probably avoid these markets, categories and funds that provide stellar returns because they will provide stellar losses.
- Contrarian thinkers go against the grain. If you are a risk taker, you are probably better off buying the losers instead of the winners. We know that the only way to really make money in investing is buy low and sell high. The best way to buy low is to be a contrarian.
- On that note, it is probably a good time to take some prudent steps to managing your portfolio. Instead of chasing winners, take profits. There are reports of increasing concern about whether the markets can continue their run after almost three years of positive returns. Don’t forget to rebalance your portfolio and re assess your tolerance for risk.
- At the end of the day, you can never go wrong with diversification. It is a tired story but one that I will continue to preach. Don’t get caught with too much of anything.
Good luck and let’s hope the markets continue to reward investors for the balance of 2005.