SMI Upgrading Beats The Market
For 7th Straight Year

If the 2005 stock market was a play, it could have aptly been titled, "Much Ado About Nothing." Beginning the year, the bulls were excited for a number of reasons, including the fact that years ending in the number "5" have typically brought significant stock gains. The bears were equally sure the rally of the prior two years was ending, and gloom, doom, and universal suffering were about to resume.

In the end, neither camp was right. The stock market, as measured by the Wilshire 5000 index, sputtered to a modest 6.3%gain. Not only was the final return pedestrian, the market itself was quite docile in getting there, registering significantly less distance than usual between the market high and low points for the year. Just how calm a year was it for stocks? Consider this: It's been over two years since the S&P 500 index has moved at least 2% in a single day. The market averaged 27 such moves per year from 1997-2003.

While it was a fairly boring year on Wall Street, SMI proved that it doesn't take big market moves and daily swings to produce solid returns. Both of SMI's core strategies produced results significantly better than the market averages. In some respects, it was an ideal year for SMI readers, as they enjoyed gains in line with the long-term historical averages but without the usual gut-wrenching highs and lows that typically accompany them. (SMI's "Enhanced Just-the-Basics" and "Sector Rotation" advanced strategies also had standout performance, returning 14.6% and 46.7% respectively. For more information, including cautions regarding Sector Rotation's higher risks, visit the Advanced Strategies page. )

Our passive Just-the-Basics strategy, which we recommend for beginners and those wanting a simple set-it-and-forget-it approach, managed a gain of 9.0%, which compares favorably with the broad market's gain of 6.3%. In fairness, this isn't a completely apples-to-apples comparison, as the Wilshire 5000 index is a pure U.S. index, whereas JtB does have 20% invested internationally. Most years this isn't a terribly significant difference, but foreign markets were hot in 2005 which helped our returns. A little better than expected perhaps, but really just doing what JtB is designed to do—match or exceed the market's return.

Now on to the main event—our all-stock Upgrading portfolio. We enjoyed average gains of 12.0% last year, and for the past seven years have averaged a robust 11.9% per year. You can see in this Recent SMI Performance Table how dramatically superior those results have been compared to the market. In a $25,000 portfolio, that's the difference between making $5,568 and $29,971; in a $100,000 portfolio, that means gains of about $22,300 compared to almost $120,000. To say Upgrading pays for itself, both in terms of the cost of your SMI subscription and the hour a month or so required to implement it, is to vastly understate its effectiveness.

Any strategy is likely to excel under certain conditions, so it's important to examine how a particular approach fares under different market circumstances. The year-by-year returns listed in the performance table above vividly illustrate that Upgrading has proven its ability to excel in years when stocks have been very strong (1999, 2003), very weak (2000-2002), and relatively calm (2004-2005). In all three types of environments, Upgrading has led us through the masses of available mutual funds to find those that are able to add value to our portfolios under the market conditions then currently prevailing.

The keys to this type of long-term track record are revealed in the table below showing Upgrading's performance by risk category. Clearly, a major part of Upgrading's success is due to the fund selection process, as the Upgrading funds outperformed their peer groups in all five stock categories. But that's not the whole story—the biblical principle of diversification is also revealed as an important ingredient. Two years ago in 2003, small-company stocks were responsible for a huge share of Upgrading's market-beating performance. Last year, they played a relatively minor role, while large-company and foreign stocks provided the surge.

The main point is that SMI's Fund Upgrading strategy has proven its effectiveness in both bull and bear markets by combining a proven buy/sell discipline with broad diversification. But it can only produce this type of performance for you if you've implemented it in your portfolio. If you've hesitated to apply the principles of Upgrading in the past, there's never been an easier time to start. See Upgrading: Easy as 1-2-3  for pointers on how to begin Upgrading on your own, or see Introducing the Sound Mind Investing Fund to learn how to have Upgrading handled for you automatically.

• Overview of SMI's Fund Upgrading Strategy
• Overview of SMI's Just-the-Basics Strategy
• Performance History
• SMI Subscription Information

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