In volatile times, it may make sense to look beyond traditional investment asset classes like stocks, bonds and commodities. Past Issues 2011 Decenber 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 2010 December 2010 November 2010 October 2010 September 2010 August 2010
In volatile times, it may make sense to look beyond traditional investment asset classes like stocks, bonds and commodities.
The year-end performance of the broader markets last year was anything but memorable and the whipsaw volatility throughout was something most investors would rather forget. But a closer look reveals a wealth of wisdom to be gained from observing how events unfolded in 2011 and taking note of the way people and investments responded.
2. Volatility swings both ways. Investors tend to remember the big drops, like the three larger-than-500-point declines the Dow experienced in rapid succession during the first and second week of August last year. But the Dow also saw three days with gains above 400 points and actually closed the year up 5.5%. Not a great year, but – depending on when (or if) they got back in – investors who pulled out in August may have done much worse. Attempting to time market swings – particularly in a highly volatile environment – can be extremely risky, requiring you to be right twice, once about when to get in and once about when to get out. Wholesale allocation or strategy shifts are rarely a good idea. It is better in times of volatility to keep a portion of your portfolio flexible and nimble in the short term to capitalize on opportunities that arise. The risks (in terms of lost potential return) of not being invested at all may outweigh the risks of being invested on a down day or through a secular bear market.
3. Everything is connected but not necessarily correlated. The relationship between the U.S. and the rest of the world’s markets was never clearer than in 2011, as political tensions here and in Europe drove indices and incited downgrades of multiple nations’ credit ratings. Similarly, on the days when markets did swing, the effect was often widespread and impacted most traditional investments the same way. Correlation, or the degree to which different investments behave similarly under certain conditions, has increased in recent years – particularly among stocks. While stocks were effectively flat in 2011, U.S. Treasuries logged their best performance since 2008 and gold finished the year up 10%. In volatile times, it may make sense to look beyond traditional investment asset classes like stocks, bonds and commodities and allocate a minority portion of your portfolio to alternatives that are less or negatively correlated with other investments in your portfolio.
What you should do now:
The U.S. Presidential election may provide a psychological boost – or at least some degree of certainty about the future – for investors in November, but any fundamental changes to U.S. economic policy won’t take place until next January. Meanwhile, the majority of economists don’t expect the Euro-zone to get its collective economic act together until 2013 at the earliest. So it appears the uncertainty that fueled market volatility in 2011 will likely be with us for the bulk of 2012. You should talk to your Financial Advisor about what worked and what didn’t in terms of your investments so that together you can make an informed plan for this year.