Playing it safe had a downside

Knowing when to jump in is tough -- you might miss a big rally

By Jim J. Jubak Oct 6, 2009 2:50PM

Jim JubakThe Jubak's Picks, my 12- to 18-month portfolio, returned 8.4% in the third quarter of 2009.

Is that good or bad?

It certainly badly lagged the Standard & Poor's 500 stock index, which returned 15.6% in the third quarter. It's pretty easy to explain most of the lag in the Jubak's Picks: The portfolio was 40% in cash for much of the period because I didn't trust the rally that began on March 9th.

Another hunk of the portfolio was in safe stocks such as PepsiCo (PEP) and ExxonMobil (XOM) that trailed the commodities, industrial and financial stocks that led the rally. Oh, and I had almost nothing in financials during the quarter.

In retrospect, during the quarter I played it too safe and left substantial profits on the table as a consequence.

Of course, that's what happens when you decide to play it safe and the stock market delivers one of the biggest rallies off a bottom in history.

If you look at the year's first nine months, which includes the nosedive into that March 9th bottom, my play-it-safe strategy wasn't nearly as expensive. As of the close on September 30th, the return on Jubak's Picks for 2009 was 16.7%. That's a decent performance compared to the 19.3% return on the S&P 500.

Play-it-safe strategies are usually rooted in some really traumatic period of stock market performance -- they're often a reaction to fear rather than a forward-looking maneuver to avoid disaster. 

So, my play-it-safe strategy in 2009 was a reaction to getting killed at the end of 2008 when commodities stocks, which had been the star performers of last year's first half, crashed while my portfolio was still stuffed with them. 

You can see that reflected in the portfolio's -8.1% return for the 12 months that include the fourth quarter of 2008. The total return on the S&P 500 during that period was a -6.9%.

Longer term, the Jubak's Picks portfolio is up 3% for the three years from September 30, 2006 through September 30, 2009. That's not an annual return, mind you, but the total return for the portfolio over that entire period. Think that's grim? The S&P 500 shows a 21% loss for that three-year period. That's how tough this huge bear market has been on investors.

Looking back five years -- a period which takes in some of the recovery from the bear market that began in 2000 but none of the losses from that bear -- Jubak's Picks is solidly in the black with a return of 69% versus a 5% loss for the S&P 500. Since its inception on May 7, 1997, Jubak's Picks is up a cumulative 268% (versus a 25% return for the S&P 500.)

You can find the performance of Jubak's Picks in comparison to the Dow Jones Industrial Average and the NASDAQ Composite in the table below.

A final but very preliminary word on the performance of The Jubak Picks 50 portfolio I started tracking on December 30, 2008. The return on that portfolio, based on my 2008 book, The Jubak Picks:  50 Stocks That Will Rebuild Your Wealth and Safeguard Your Future, was 28% for the six months ended on June 30, 2009. And now, with this rally, it's climbed to 50.5%.

Now, short-term returns don't mean much -- especially when they start, as these do, from a depressed level in a bear market and have the good luck to catch a huge market rally. Still, I'm encouraged that in an up market, this portfolio has outperformed the 19.2% return on the S&P 500 for the first three quarters of the year. 

The chances that this long-term portfolio could beat the S&P in the long haul would be very slim if it lagged badly during a market like this.

It remains to be seen how this portfolio does, comparatively, in a sell off. It takes a good ten years for a portfolio to really prove itself. Still, I'd rather start out 50.5% ahead than 50.5% behind. As they say, it's better than a poke in the eye with a sharp stick.

You can follow both these portfolios in detail -- including every buy and sell and those oh-so-meaningless but oh-so-captivating short-term returns for individual stocks -- by clicking here and here.

Below you'll find the performance of the Jubak's Picks in comparison to the three major stock indexes:

Jubak's Picks versus major averages in Q3 2009 and 2009 to date:
Index Third quarter YTD
Jubak's Picks 8.4% 16.7%
Nasdaq Composite Index ($COMPX) 14.0% 34.6%
S&P 500 Index ($INX) 15.6% 19.3%
Dow Jones industrials ($INDU) 14.6% 10.7%
Longer-term performance: 
Index 3-year return* 5-year return** From inception***
Jubak's Picks 3% 69% 268%
Nasdaq Composite Index --6% 12% 57%
S&P 500 Index -21% -5% 25%
Dow Jones industrials -17% -4% 33%

*From the market's close on September  29, 2006, through the close on September 30, 2009. **September 30, 2004, through September 30, 2009.. ***May 7, 1997, through September 30, 2009.

All returns for Jubak's Picks deduct costs of commissions on each buy and sell. Returns for Jubak's Picks and the indexes include dividends.



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