What Should You Do About the Fluctuations in the Stock Market?

    This should really be titled, "What do I think you should do about the fluctuations in the stock market?", since this is manifestly only my opinion, but here goes.
    What follows is just a down payment on a lot of material that I want to write. It will include links to free investment tools and resources, low-fee brokerages, information regarding the mutual funds with the highest 10-year rates of return (e. g., the Bridgeway and Baron Partners Funds), the investment advisory newsletters with the highest recent rate of return (currently the Cabot China and Emerging Markets newsletter at 108.7% for the last year), and the hedge fund with the highest 20-year rate of return of which I'm aware (the Renaissance Technologies' Medallion with a 20-year rate of return of 38%+ per year). But all this takes time which, for me, between Amber, the daily Science news, and the demands of the stock market, is in desperately short supply. In the meantime, here is a summary I wrote for friends and family.
    So what should these market fluctuations  mean to you? In my opinion, they shouldn't mean anything. What I've always done in the past is to hunker down and wait for the wind to change. Of course, there are plays that bet against the markets, plays that bet on a falling dollar, and plays on ever-rising petroleum prices, but in my book, this is sheer (and dangerous) gambling. It's much safer to "go contrarian", gradually buying in when the stock market falls and then buying back when it rises. 
    First, I don't think that anyone who has a full-time job should try to invest in individual stocks unless they're guided by an investment advisory newsletter. And when it comes to investment advisory newsletters, the Hulbert Financial Digest ($150 a year) is the "Consumer Reports" for financial advisory newsletters. Since the Hulbert Financial Digest's inception in 1980, Mark Hulbert has independently simulated and reported monthly on what is now over 200 financial advisory newsletters. To cut to the bottom line, two newsletters have stood the test of time over this 28-year period: the No-Load Fund X newsletter, which recommends the best-performing mutual funds each month, and The Prudent Speculator, which recommends individual stocks. These advisory services have generated returns for their investors over the past 28 years in the range of 13%-to-19%, depending upon the starting and ending points during which the measurement is made. For example, for the periods ending on March 31, 2008:

Period Fund % Gain Fund % Gain
25 Years Prudent Speculator 15.5% No-Load Fund X 13.4%
20 Years Prudent Speculator 18.2% No-Load Fund X 14.3%
15 Years Prudent Speculator 19.9% No-Load Fund X 14.7%
10 Years Prudent Speculator 11.8% No-Load Fund X 12.9%

    Note that these returns represent the average returns generated by the two or few types of funds/stock portfolios offered by the two newsletters. Generally, both newsletters offer more- and less-aggressive portfolios geared to more aggressive and more conservative investors.
    Last year, when the stock market was at a peak, the best-performing No-Load Fund X portfolio had a 17.8%-per-year, average 25-year rate of return, and best-performing Prudent Speculator portfolio sported a 19.1%-per-year average 25-year rate of return.
    There are other investment advisory newsletters that also perform better than the S&P 500 index, but these two newsletters seem to me to outperform other investment newsletters over the 25-year period. Of course, this leaves open the possibility that better investment newsletters might exist, but haven't had time to develop the 25-year track records of the longest-lasting newsletters.
    No-Load Fund X uses a strategy initiated by Janet Brown in 1970, and honed over the past 38 years. once a month, she updates a list of top-performing no-load mutual funds, gradually dropping funds that are falling behind and replacing them with other mutual funds that have begun to offer better trailing returns. I think the algorithm is purely mechanical and doesn't involve trying to predict which funds are liable to outperform in the future, although I don't really know. Ms. Brown has been at this for 38 years, so the question of succession enters the picture. However, I have the impression she has a staff that can carry out the selection process without her daily supervision.
    The Prudent Speculator utilizes a stock selection strategy formulated by the late Al Frank, beginning in 1977. Sadly, Mr. Frank died of cancer in 2002, but his long-term associate, John Buckingham, has followed in his footsteps since 2002, and has done, perhaps, a little better than Al Frank at steering his investors to consistent profits.
    Over the past five years, The Prudent Speculator and No-Load Fund X don't usually appear at all among the top five newsletters. The reason isn't that The Prudent Speculator and No-Load Fund X aren't doing as well as ever, but that other newsletters--temporarily--are doing better. But by the time we get to the 10-year track records, the top-performing newsletters over the past 5 years generally fall by the wayside, leaving No-Load Fund X and The Prudent Speculator standing tall among the remnants  of funds that have burned like meteors across the sky, only to flame out.
    What's exciting about these proven performers is that if we can count on a long-term rate of return of 15% or better (using their most successful portfolio or mutual fund), then not only can we double our money in about 5 years (before correcting for inflation), we can also take out more money per year when it comes time to withdraw our money (e. g., after retirement). (I'm estimating that the doubling time with these funds would be a little over 6 years after correcting for inflation... assuming that the rate of inflation we're experiencing right now is an anomaly.) To press this point, if I could earn twice the after-inflation rate of return of an S&P 500 index fund, then since I don't want to withdraw my principal but plan to withdraw only interest, I can get four times as great an income with this hypothetical fund as I could with an S&P 500 index fund. (In practice, three times the rate of return of an S&P 500 index fund might be realistic with No-Load Fund X and The Prudent Speculator, or with the No-Load Fund X Aggressive ETF mutual fund (Symbol: UNBOX), or The Prudent Speculator Al Frank fund (Symbol: VALUX--see below).
    Both No-Load Fund X and The Prudent Speculator have launched mutual funds over the past few years. You'll pay a 1%-per-year management fee for these funds on top of the (typically) 1% fees that no-load mutual fund typically charge for administrative costs. Still, for anyone who values their time, I would recommend signing up for the mutual funds rather than investing via the newsletters.


    UNBOX was established on 1/1/2007.



    VALUX was established on 1/1/2000.
    These Fidelity charts will automatically update.
    Note how much better both these funds are doing than the S&P 500.
    Other mutual funds can do better than these funds over 5-year periods, but probably, considering the track records of their underlying investment strategies, these funds will be among the top-performing funds over the 25 years.