Rules of the Game: Buy What Works

 | May 24, 2013 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

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vnq

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spg

 I used to be disgusted, and now I try to be amused.

No, nothing about angels and red shoes. I'm talking about the pundit class nattering on about where they think this index or that will close the year. Why anybody cares about somebody's prediction is mostly beyond me.

I say "mostly" because I understand that some investors and traders like reassurance from so-called experts. They want to relax knowing (well, assuming, anyway, which is not the same as knowing) they can make a move in one direction or the other, and it will be safe, because so-and-so on TV was very confident about the market direction.

That sounds like the road to riches, doesn't it?

There are other factors that go into the quest for the perfect prediction. Confirmation bias is a big one. People tend to favor opinions and information that line up with their existing views.

Think the market is doomed to tank to zero and below, just keep caving to infinity? Well, there are pundits out there for you. Or, if you think markets will bounce back nicely after the QE tapering scare, and ramble on to great heights, there are pundits for you, too.

But rather than hitching your wagon to some pundit's star, or latching onto to some far-fetched (and historically implausible) theory, think about what's actually working. What is the market action actually telling you?

Let's start with the U.S. indices. Contrary to what the "America is doomed" crowd has been saying, domestic stocks have been performing well vs. international.

 We hold the S&P 500 for clients in the form of the iShares S&P Index ETF (IVV), which is up 16% year-to-date. This is a liquid, low-cost way to access the broad U.S. market. Remember, the S&P 500 accounts for more than three-fourths of the U.S. stock market's value.

Real GDP grew 2.2% last year. That's slower than the average over the past 60 or so years, but corporate profits are real, and are boosting the equity markets. There's some "doom-and-gloom" defiance right there.

Margin expansion could be constrained, and there could well be a decline before U.S. stocks are ready to resume their rally. And it's true that stocks are no longer cheap, using traditional valuations, but the corporate performance indicates there is further room to run.

Another area showing strength in 2013 is real estate, particularly REITs. We hold the Vanguard REIT EFT (VNQ) in client portfolios. It's taken a tumble this week, along with the broader market, but it has notched a year-to-date gain of nearly 14%.

The VNQ fund tracks the MSCI US REIT Index. VNQ is a REIT of REITs, and offers exposure to commercial real estate. Its main holding is Simon Property Group (SPG), which operates malls throughout the country.

One of the things we like about commercial REITs: Property owners get paid rents. It's not the same as buying Acme Manufacturing because you like the potential for their widgets. Instead, you buy the stock of the company that rents manufacturing space to Acme.

Those are a couple areas that you won't necessarily hear a lot of punditry about, but which have been outpacing other asset categories this year.

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