Financial market relationships are characterized by cycles whose direction and amplitude change over time by taking the sectors that make up the S&P 500 and analyzing how they rotate from top to bottom. This is all based on the basic investment rule of “mean reversion.”

Many academic studies of Wall Street’s behavior have demonstrated the strong evidence of something that statisticians like to call “negative serial correlation.” This simply means that the stocks that performed well in years past actually tend to underperform going forward.

For example, in the chart above, energy and materials have been the best performing market categories for the past two years, but were in the lower half the year before that.

This anomaly is mostly created by investors’ tendency to overreact by positive or negative news. Based on historical data, the majority of investors tend to follow the crowd rather than act in a logical, well-thought-out way. Most are pulled along by fear and greed. Investors should be diversified. They should rebalance annually and not chase fund performance.

Robert Schiller, an economics professor at Yale University, stated that there is a regression to the mean for stocks and sectors. That is, what goes up signifi cantly tends to come back down, and vice versa. Mean reversion exists in many different forms within investment markets, and none of these forms is necessarily inconsistent with efficient markets.

Many times, investors come into the various asset classes, like small value, small growth or gold, after that asset class has already had a substantial upward move. Those late-arriving investors are exposed to higher risks of capital loss because of mean reversion. If you rebalance your portfolio annually, you will have a greater opportunity to catch the great swings in the market.

Please consider carefully the fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Diversification does not protect an investor from market risks and does not assure a profit. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Gold funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 3% to 5% of your portfolio in gold or gold stocks. Investing in small- and mid-cap stocks may be more risky and more volatile than investing in large-cap stocks. Tax-exempt Income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Bond funds are subject to interest-rate risk; their value declines as interest rates rise. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.