A tumultuous year for stocks. As 2011 winds up, many investors are more concerned with return of capital than return on capital. That is understandable; Wall Street faced some powerful headwinds this year. The debt crisis in Greece boiled over to Italy and touched Spain and France, scaring the world economy. Key heads of state from the European Union reaffirmed their countries commitments to the euro and sought to reassure investors; many observers saw as much rhetoric as action in their efforts and were skeptical that the EU could effectively address its debt crises in the coming years. At home, our economy expanded, but not as much as would be hoped for in the typical recession recovery. Unimpressive job creation and high unemployment thwarted any housing rebound, despite record-low mortgage interest rates. Many consumers perceived the economy as bad and Congress as even worse, but consumer spending and retail purchases showed improvement in an economy where inflation hovered around 3.5% and growth hovered around 2%. A super committee of 12 Capitol Hill legislators could not agree on where to make cuts to the federal deficit, only months after a drawn-out fight to raise the debt ceiling prompted Moody’s to issue a historic downgrade of the U.S. credit rating to AA+. What would have been stunning volatility during most of the 1990s or 2000s seems par for the course today as we have to hang on, stay diversified and ride out the turbulence hoping that our stock market can manage at least a bit of decoupling from the debt troubles plaguing continental Europe.
If your pessimism increased this year, you aren’t alone. This is a very challenging environment, even for fund managers. A recent Wall Street Journal piece referenced that some traders are reluctant to make a decisive move for fear of triggering a big price swing on a particular stock. Liquidity has also been reduced in this market. 7
While this sounds gloomy, a little perspective is helpful. When it comes to stocks, it is really about the long term.
This year hasn’t been a disaster, just a struggle. The market has seen far worse stretches than this. The S&P 500 lost 24.06% across the years of 2008-09; yet even with all the drama of 2011, the index held up with low historical valuations.
On January 14, 2000, the Dow closed at a new all-time high of 11,722.98. On October 9, 2002, it was 37.85% lower after a bear market memorable for a 77.93% decline in the NASDAQ. Yet even in the wake of the dot-com bust and 9/11, the Dow was not crippled. It rose 61% over the next four years to hit a new all-time high of 11,727 on October 3, 2006.2
The blue chips have risen and fallen since then, and so have small caps and tech stocks. Yet investors can still make money in bad Wall Street years; no one invests directly in an index, so the potential to beat the market remains.
Alternative Investments. Alternative investments like REITs, Long-Short Funds, Gold, Master Limited Partnerships, and other non-equity strategies have fared well in 2011. Bonds have also helped protect portfolios during the down months this year.
Comparatively speaking, we’re holding up pretty well. As we bid goodbye to 2011, we can be thankful that our stock market is performing better than many others. The Dow has outperformed nearly all the world’s other important stock indices.
How well-diversified is your portfolio? From 1990-2009, the S&P 500 returned an average of 8.2% annually, yet the typical investor averaged a 3% yearly return. Why? Investors chased performance. They got emotional, responded to headlines, and ignored fundamentals of diversification and patience. They bought at market peaks and bailed out at market lows, and then they waited for that rare “perfect moment” to get back into equities.4, 6
Instead of fleeing the market when stocks hit headwinds, the seasoned investor takes a moment to consult his or her financial professional of choice and adjusts the sails in response while still investing consistently with quality as a key criterion. That approach may help you ride through the next few years and give you a chance to outperform the emotionally-driven investor in the long term.
Do you have concerns about your investments right now? We’re happy to help you address them. Let’s talk about where you are at right now with your portfolio and the level of progress you are making toward your financial objectives. The more you understand about the long-term behavior and potential of the market, the more you realize the need (and value) of patience and perseverance.
1 – money.cnn.com/data//sandp/ [11/25/11]
2 – www.finfacts.com/Private/curency/djones.htm [11/25/11]
3 - money.cnn.com/data/markets/dow/?iid=H_MKT_Data [11/25/11]
5 - news.morningstar.com/index/indexReturn.html [11/26/11]
6 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [11/26/11]
7 - online.wsj.com/article/SB10001424052970203658804576637544100530196.html [11/28/11]
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