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Three Investment Lessons from 2011 |
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Tough Year for Forecasters - The graphic to the right illustrates the 2011 performance forecast of over 2000 instituional investors and the actual 2011 outcome through the end of November. The real world results defied the conventional investment wisdom and some of the best minds in the business. The fortune tellers missed the actual outcome in all three cases.
The Lesson: Do not worry or concern yourself with predictions about the future direction of the financial markets in 2012. The predictions are no better than a coin flip.
 The Tale of Two Markets - 2011 was the tale of two markets. Through July 22nd, the global stock markets were on a positive roll up 6.7%. Then US policy makers started wrangling about the debt ceiling and their overseas counterparts were slow in reacting to Eurozone financial issues.
As a consequence, investors demonstrated their disapproval by exiting the global stock markets at a faster pace than during the 2008-2009 credit crisis. By the end of the 3rd quarter, the global stock market was down over 17% from its July high. This volatility left many investors with portfolios that had drifted from their target asset allocation.
Our rebalance discipline required that we bring those allocations back to target thereby selling high quality bonds (the recent winners) and buying stocks (the recent losers) to bring portfolios back in line with their target allocations. The new stock purchase proved timely as the global stock market bottomed the first week of September and rallied 7.6% by the end of the year.
The Lesson: Rebalancing improves portfolio performance and disciplines what and when to buy and sell.
 Was 2011 a Snoozer? YES! If you fell asleep when 2011 began, the S&P 500 stock index was at 1257.64. If you woke up on New Years Eve, the S&P 500 was at 1257.60 (down 4 bps).
If you stayed awake all year, the story was entirely different as news headlines took stocks on a rolller coaster ride. The S&P 500 was up as much as +8.43% and down as much as -12.60% during 2011. The MSCI World Stock market index was down -5.54% for the year which is the benchmark that we use for client's stock portfolios. We expect Election Year headlines to provide similar volatility in 2012.
The Lesson: The markets are full of uncertainty. When uncertainty is growing, asset prices fall. Falling asset prices create the opportunity for disciplined investors to profit from the emotion in the market by rebalancing (selling high and buying low). We recognize that being an investor during uncertain times isn't a lot of fun. However, a disciplined investor lets the volatility work for them not against them. We are here to be the disciplinarian for your portfolio!
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