Editor’s Note: MarketOwl is a totally free publication. We hope you find the commentary interesting, insightful and valuable. If so, please encourage your friends and acquaintances to sign up.

With the arrival of fall, it is hunting season in much of the United States. In our area, hunters are currently pursuing big game animals like deer and elk. An interesting phenomenon takes place on the opening morning of hunting season. As you sit and wait for the sunrise, the world around you awakens. You can hear the wind through the leaves and the songs of birds. As the light gets brighter, it is easy to imagine that the animal you seek might appear at any minute.

But most of the time, you don’t see anything. Before long a gunshot echoes from a distant location. Then you hear another shot, this time much closer. As the morning passes, you hear more shots in almost every direction, but you have yet to even see an animal. Your discouragement builds because from the sounds of all the shooting, you are convinced that every other hunter within miles is having success.

Right now something similar is happening with investors. The financial media is reporting almost daily that the Dow has set yet another record high. They talk about how General Motors or some other stock is up 70% for the year. Pretty soon the normal investor begins to believe that everyone else’s portfolio is growing by leaps and bounds. He wonders why he is the only one not making fantastic gains.Just like the sound of distant gunshots is a poor barometer of a successful hunt, relying on hearsay is not a reliable method of determining investment success. In Utah, over the course of a normal rifle deer hunt, about 35% of the hunters will bag a deer. About 10% of those hunters (3.5% of the total) will get an animal on opening day. So while it might sound like everyone is getting lucky, 96% of the hunters are wondering why they aren’t seeing the animals that everyone else is apparently seeing.

For now, the Dow is the only major index that has reached record levels. The S&P 500 is still about 11% below its previous high. The Nasdaq is still 60% away from a new record. Most stock indices are now trending upward, but most mutual funds and other investment vehicles are trailing the performance of the Dow.

Let me use a couple charts to illustrate what is happening. Below you see a year-to-date comparison of the Dow (black line), the S&P 500 (blue line) and the Nasdaq (gold line). You can see that the Dow is up about 10% for the year, the S&P about 8% and the Nasdaq about 4%. But returns are more about timing and perspective than about percentages.

For example, an investor who bought the Dow in mid-July has also seen a gain of 10%. But an investor who purchased the Nasdaq in mid-July would be up almost 12%. An investor who purchased the Dow in early May might only be up 1%. While an investor who bought the Nasdaq at that time would show a loss of 2%. Keep in mind that the Dow represents 30 stocks, the S&P is 500 stocks, and the Nasdaq includes more than 3,000 stocks.

So while the Dow is soaring, most indices, most stocks and most mutual funds are not doing as well–yet.

Let’s look at another comparison. On the chart below, the black line is Wells Fargo Mid Cap Disciplined Investor Fund (SMCDX) and the gold line is the Dow. For the year, SMCDX is up 11.65%–slightly ahead of the Dow. This fund is in a long-term, strong uptrend. It has a history of great performance. The average annualized return over the life of the fund is 17.05%. For the past three years it is averaging an annualized return of 17.35%. The fund also has a beta of .80, meaning it is 20% less volatile than the S&P 500.

We recently purchased this fund in the Strategis Foundation Strategy. The purchase was made in late August, after we were confident that the correction that began in May was over and a new rally was underway. Since our purchase, the fund has only gained about 1%, while the Dow is up almost 4%. Many investors make the mistake of making decisions based on short-term performance. In other words, someone looking at this chart might decide that based on what has happened over the past five weeks, the Dow would be a better investment option than SMCDX.

But remember that averaged annualized return I mentioned above? Since the start of 2004, the Dow has returned about 10%–the same 10% that it gained since mid-July. On the other hand, over that same period, SMCDX has gained more than 46%–four times as much. Based on that information, if you had to make a choice today about where to invest $100,000 for the next two years, would you invest in the Dow, which just set a new record, or would you choose SMCDX?

Many years ago I learned that when it comes to hunting, the shots I hear all around me are meaningless. Perhaps the guy on the next ridge just bagged a state record deer. On the other hand, maybe he got bored and shot at a tin can because he hasn’t seen any animals. My best chance for success is to find an area I know the animals are using and then wait patiently for an opportunity. Even if I pick the perfect spot, I might not see the animal I want today, tomorrow or even this season. Or I might see it in the next five minutes.

With investing, I can’t worry about my how much money my neighbor made in the past six months. I can’t fret over the fact that the Dow has gone up 10% while my account might only be up 2%. My best bet is to choose good investments, have a good strategy, and then just be patient. Eventually, I’ll be the one that scores.

F.S.
If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group. This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call Mark Sumsion or Scott Garbutt at 800-279-3377.