Happy New Year! I wish you the best of success in 2012. Let’s review 2011 and then see if there is anything of interest in the investment universe.
2011, a forgettable year
2011 was an extremely challenging year for stock investors. The markets displayed wild volatility yet basically finished where they started (at least for US stock investors). Here are the year-end returns for some popular indices (according to Morningstar):
S&P 500 (US stocks) 2.11%
MSCI EAFE (International stocks) -12.14%
MSCI Emerging Markets -20.41%
Barclay Aggregate Bond 7.84%
Gold 10.18%
All told a pretty difficult year. Bonds and gold were good performers while stocks struggled substantially in the last half of the year.
Where are we Now?
Today things are certainly different than at this time a year ago. Mainly and most importantly in my opinion, interest rates were higher a year ago and bonds were much more attractive as an asset class then they are today. A year ago, treasuries were a despised investment, whereas now they are loved (and considered the only “safe haven”). The yield on the ten year treasury at the beginning of 2011 was about 3.5%. Today it is under 2%.
As investors love for treasury bonds grows, their fondness for other types of investments decreases. This has created opportunities. For example, the current yield on US, International, and Emerging Market stock indices are all higher than the ten year treasury yield. In fact, according to MSCI, the yield on the EAFE (Europe, Australasia, and Far East) index is about 4% and the Emerging Markets index is over 3%.
Also, according to Fidelity Investments, bank loans (as measured by the S&P/LSTA Leveraged Performing Loan Index) are trading at 90 cents on the dollar and yielding over 7%.
In other words, fear over Eurozone problems have driven investors to the safe haven of treasuries and opened the doors for some reasonable opportunities.
Reasons for Cheer
Most investors have a pessimistic outlook today. With volatile markets, a weak economy, and poor leadership in Washington and Europe, this is easily understandable. It may be hard to see that good things can happen in the economy and for investors. But there are some reasons for optimism, including:
Housing. The bursting of the housing bubble has been a detriment to economic growth for the last three to four years. As prices return to more reasonable levels, economic activity related to housing should stabilize and at least stop being a drag on economic growth.
Households Improved Cash Flow. Like the housing decline, private sector deleveraging has probably run most of its course. At the height of the housing bubble, households simply had too much debt. This was bound to end badly, and of course it did. But it is now most likely that we are in the eighth or ninth inning of the deleveraging cycle
Economic Growth. It’s also important to remember that our economy is very robust and dynamic. I’m amazed at the technology that has improved my life (both personal and business) in the last year alone and I look forward to future products and services available to all of us. Is there something new and exciting coming our way soon? I wouldn’t bet against it.
Reasonable Values . From time to time I have written about the expected return of the US stock market (over a several year period). My opinion is that a reasonable expectation for a stock investor at today’s levels (S&P 500 at 1250) is about 6%. (If you’d like to know how I derive this number please contact me for the details). An investor who buys the S&P 500 today and holds it for 7-10 years will likely earn an average return of about 6%. (Of course, this doesn’t mean the returns will be smooth. Most of the individual years will be much higher and much lower).
A balanced portfolio of US, international, and emerging markets stocks may earn an average of 7-8% or so over the next seven to ten years. While this is lower than historical averages, it is substantially better than the two percent yield in ten year treasuries.
An Uncertain Future…Just How We Like It
“I’m astounded by people who want to ‘know’ the universe when it’s hard enough to find your way around Chinatown.” — Woody Allen
“Uncertainty is an uncomfortable position. But certainty is an absurd one.” –Voltaire
In my business too many people believe they can predict the future. They cannot. It is important for us to always remember that the future is unknown. No one knows what the markets will do in the next month or year or whether or not we will have a recession or boom. There are only opinions.
There will always be uncertainty. As investors, we must embrace this fact. And as hard as it is to accept, we actually wouldn’t want it any other way. Because if the future were known, there would be no return on investment. When you think about it, uncertainty is really the only source of opportunity.
The key to your investing success in 2012 and beyond is in consistently applying a sound, disciplined process. This includes a reasonable allocation of your portfolio, managing expenses well, and monitoring investment positions. Any convictions you (or anyone else has) are a secondary part of the process, and a distant one at that.
Best wishes to you in 2012!
You May Be Interested In
I recently earned the Accredited Investment Fiduciary® designation through Fiduciary360. I’m extremely excited to be part of such a high quality organization. You can learn more about AIF® here.
****************************************
Please note: This commentary is for informational use only. It is not recommended as investment advice. Seek the advice of a qualified investment advisor before making any investment.
Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC. Comments and questions are welcome.
McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ. Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.
For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.
Happy New Year
2011, a forgettable year
2011 was an extremely challenging year for stock investors. The markets displayed wild volatility yet basically finished where they started (at least for US stock investors). Here are the year-end returns for some popular indices (according to Morningstar):
S&P 500 (US stocks) 2.11%
MSCI EAFE (International stocks) -12.14%
MSCI Emerging Markets -20.41%
Barclay Aggregate Bond 7.84%
Gold 10.18%
Where are we Now?
Today things are certainly different than at this time a year ago. Mainly and most importantly in my opinion, interest rates were higher a year ago and bonds were much more attractive as an asset class then they are today. A year ago, treasuries were a despised investment, whereas now they are loved (and considered the only “safe haven”). The yield on the ten year treasury at the beginning of 2011 was about 3.5%. Today it is under 2%.
As investors love for treasury bonds grows, their fondness for other types of investments decreases. This has created opportunities. For example, the current yield on US, International, and Emerging Market stock indices are all higher than the ten year treasury yield. In fact, according to MSCI, the yield on the EAFE (Europe, Australasia, and Far East) index is about 4% and the Emerging Markets index is over 3%.
Also, according to Fidelity Investments, bank loans (as measured by the S&P/LSTA Leveraged Performing Loan Index) are trading at 90 cents on the dollar and yielding over 7%.
In other words, fear over Eurozone problems have driven investors to the safe haven of treasuries and opened the doors for some reasonable opportunities.
Reasons for Cheer
Most investors have a pessimistic outlook today. With volatile markets, a weak economy, and poor leadership in Washington and Europe, this is easily understandable. It may be hard to see that good things can happen in the economy and for investors. But there are some reasons for optimism, including:
Housing. The bursting of the housing bubble has been a detriment to economic growth for the last three to four years. As prices return to more reasonable levels, economic activity related to housing should stabilize and at least stop being a drag on economic growth.
Households Improved Cash Flow. Like the housing decline, private sector deleveraging has probably run most of its course. At the height of the housing bubble, households simply had too much debt. This was bound to end badly, and of course it did. But it is now most likely that we are in the eighth or ninth inning of the deleveraging cycle
Economic Growth. It’s also important to remember that our economy is very robust and dynamic. I’m amazed at the technology that has improved my life (both personal and business) in the last year alone and I look forward to future products and services available to all of us. Is there something new and exciting coming our way soon? I wouldn’t bet against it.
Reasonable Values . From time to time I have written about the expected return of the US stock market (over a several year period). My opinion is that a reasonable expectation for a stock investor at today’s levels (S&P 500 at 1250) is about 6%. (If you’d like to know how I derive this number please contact me for the details). An investor who buys the S&P 500 today and holds it for 7-10 years will likely earn an average return of about 6%. (Of course, this doesn’t mean the returns will be smooth. Most of the individual years will be much higher and much lower).
A balanced portfolio of US, international, and emerging markets stocks may earn an average of 7-8% or so over the next seven to ten years. While this is lower than historical averages, it is substantially better than the two percent yield in ten year treasuries.
An Uncertain Future…Just How We Like It
“I’m astounded by people who want to ‘know’ the universe when it’s hard enough to find your way around Chinatown.” — Woody Allen
“Uncertainty is an uncomfortable position. But certainty is an absurd one.” –Voltaire
In my business too many people believe they can predict the future. They cannot. It is important for us to always remember that the future is unknown. No one knows what the markets will do in the next month or year or whether or not we will have a recession or boom. There are only opinions.
There will always be uncertainty. As investors, we must embrace this fact. And as hard as it is to accept, we actually wouldn’t want it any other way. Because if the future were known, there would be no return on investment. When you think about it, uncertainty is really the only source of opportunity.
The key to your investing success in 2012 and beyond is in consistently applying a sound, disciplined process. This includes a reasonable allocation of your portfolio, managing expenses well, and monitoring investment positions. Any convictions you (or anyone else has) are a secondary part of the process, and a distant one at that.
Best wishes to you in 2012!
You May Be Interested In
I recently earned the Accredited Investment Fiduciary® designation through Fiduciary360. I’m extremely excited to be part of such a high quality organization. You can learn more about AIF® here.
****************************************
Please note: This commentary is for informational use only. It is not recommended as investment advice. Seek the advice of a qualified investment advisor before making any investment.
Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC. Comments and questions are welcome.
McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ. Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.
For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.