For better or worse, some people are just market “junkies” (Hi, my name is Jay). Stocks, options, futures, ETFs, sure, whatever. Bring it on. Hey why not throw some FOREX in there too (just to make my head hurt as I try or the umpteenth time to wrap my head around currency conversions)? Bottom line, whatever it is, as long as it relates to the financial markets, we’re interested.
But not everyone is like this (Or so I’m told). Some people like to put their money into something and just kind of leave it there and let it grow over time. And as I avert my eyes momentarily from a quote screen I can see that this approach has a certain simple elegance to it. So today, let’s touch on a simple strategy “for the other half” (or as they are more commonly known outside of “market junkie” circles – “normal people”).
Growth & Income
For most “normal people” there are basically two ways to make money in the financial markets – buy something and watch it grow in value and sell it later at a profit, and/or invest in something that pays interest and or dividends along the way, thus generating a potential “stream of income.”
A lot of investors also combine the two concepts and invest in things that not only can “grow” but which can also generate “income.” (The mutual fund industry figured this out a long time ago and sometime during the 1980’s helpfully launched approximately 12,356 mutual funds titled “[Mutual Fund Family Name Here] Growth & Income Fund.” )
So sure that’s one way to go. Here is another.
Utilities & Intermediate-Term Government Bonds
Lots of people buy utility stocks because they tend to pay a higher dividend yield than the average stock. Likewise, during bull markets they tend to go up in price. Additionally, lots of people buy intermediate-term U.S. government bonds because they are considered “safe” in terms of payment of principal and interest (although since they are issued by the largest debtor in the history of this particular planet, I suppose it can be argued that, “I do not think that word means what you think if means”). In any event, a lot of people do it. So let’s look at a simple strategy that combines the two ideas.
Jay’s Growth & Income System
Here are the rules:
1) If Fidelity Select Utilities Growth (ticker FSUTX) closes the end of the month above its 21-month moving average (of monthly closing prices), buy and/or continue to hold utility stocks.
2) If Fidelity Select Utilities Growth (ticker FSUTX) closes below its 21-month moving average (of monthly closing prices) for two consecutive months, then sell utility stocks and buy intermediate-term government bonds.
Starting at the end of 1988, there have been 3 full round turns (buying and selling utility stocks) and the “system” is still holding long utility stocks on the 4th round turn.Figure 1 – Jay’s Growth & Income System Buy and Sell Signals (Chart courtesy of AIQ TradingExpert)
For the record, the results that appear in Figures 2 and 3 reflect the gain or loss achieved by switching between Fidelity Select Utilities Growth (ticker FSUTX) and Fidelity Government Income (ticker FGOVX). The results do not include any dividends paid by these funds along the way. Figure 2 – Growth of $1,000 (12/31/88 – 4/17/14)
Figure 3 – Annual Results
Note that the system is by no means without risks. There were 5 calendar years that witnessed a loss (including a worst of -13.2% in 2008). Still, for better or worse, the average annual gain (not including fund dividends paid) was 12.1%.
Maybe 12.1% a year (plus dividends) floats your boat and maybe it doesn’t. That’s for each investor to decide for themselves. The real point of this particular article is not to convince you to utilize the method I have highlighted. The real point is simply to illustrate the fact that there are some pretty simple methods out there that can allow “normal people” (and I think you know who you are) to generate some relatively steady rates of returns without fixating on every gyration of the stock or bond market.
Now if you will excuse me, I think the EuroYen just moved two pips…