Lynn O'Shaughnessy

Recently, currency strategists were in a tizzy about the dollar.

The dollar rang in the new year by recording its biggest two-day plunge against the euro in five years. The dollar continued its funk when the job figures from the federal government were released, and it fell even more on fears that the economy was about to hit its anti-lock brakes hard.

Uh, oh. The dollar might be in trouble. Or maybe not. Before anyone starts worrying about whether the dollar needs intravenous fluids, we should explore what kind of success that experts, who love making financial predictions, enjoy. A good place to start is to get reacquainted with what the soothsayers were saying at the start of 2005.

Prediction No. 1: Inflation and rising interest rates will be 2005's boogeymen. A year ago, plenty of experts worried that inflation was going to break out of its cage. If this happened, untamed inflation would wreak havoc on plenty of innocent bystanders. Fixed-income gurus fretted that rising interest rates would have the real estate sector doubled over in pain and grabbing fistfuls of ibuprofen. And with bonds expected to offer higher rates, lots of investors would ditch stocks for a less risky bond fix.

OK, so what happened? Not much. In an attempt to curb inflation, Federal Reserve Chairman Alan Greenspan had started a campaign to hike short-term rates in mid-2004, and he continued the rate hikes in 2005. By the end of last year, the central bank had bumped them up 13 times. All those rate hikes, however, made very little difference if you looked at the yields on the popular 10-year Treasuries in 2005.

These Treasuries started 2005 by offering a yield of 4.22 percent and inched up to 4.39 percent by year's end. The yield on the 10-year Treasury is commonly used to calculate mortgage rates. The danger to real estate investors never materialized. In fact, real estate funds kicked butt, with the average real estate mutual fund jumping nearly 12 percent. And that prediction of investors fleeing stocks didn't materialize either.

Predictions No. 2 and 3: Large-cap growth stocks will shine. Small cap stocks will retreat. Listening to Wall Street wise men, you'd have felt like a dolt if you didn't buy into the claim that blue chip growth stocks were going to fly in 2005. The big boys, after all, had been restlessly sitting on folding chairs at the dance since they were kneecapped in the 2000 meltdown. And 2005 was the year they were finally going to stand on their own. In contrast, little companies had enjoyed such a long run of good fortune that they would surely collapse.

Lynn O'Shaughnessy

Lynn O'Shaughnessy is the author of Retirement Bible.

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