Fun Facts Newsletter - January 2012

Let's pretend you've been stranded on a deserted island during 2011 and didn't even have internet access (imagine that!). So you ask, "What happened to the financial markets in 2011?" First, it was a two-stage market. In the first stage thru June 30th, everything was just fine. Most stock market asset classes had six month returns of between 4% to 6%, which were remarkably normal. Then the markets fell off a cliff, triggered by both U.S. and international government debt crises, a slow and sputtering U.S. economic recovery and economic weakness in Europe.

What was the reaction? There was a HUGE "flight to safety" wherein 2011 ended with bonds beating stocks as investors dumped stocks and flocked to bonds, driving up U.S. Treasury bond prices despite the U.S. government's deficit challenge, and driving bond interest rates down to record lows. The best performing stock asset classes were U.S. Real Estate Investment Trusts (REIT's), U.S. Large Company stocks (S&P 500) and U.S. Large Company Growth style stocks.

What lessons did we learn in 2011 and what is the strategy for 2012? Both are best summarized with two of our investment mantras:

Risk and Return are Related (the 3 R's) and,
Let's Look Forward Not Back: Invest for Future Expected Returns.

In 2011, risk was shunned and higher risk/reward assets (Value style investments, both U.S. and international, as well as U.S. Small Company and International Emerging Markets) were punished. Our strategy of including higher risk/reward assets in your portfolio was proven in the "up" days and months in 2011, but such periods were outnumbered by down periods.

Two other basic principles of investing bear repeating. First, investing requires patience (I hope no one earned a PhD coming up with that one) and, second, multi-asset class investing requires even more patience. Multi-asset class investing requires patience especially when:

Bonds outperform stocks, as they did in 2011, and
U.S. Large Company Stocks (S&P 500) are one of the best performing stock asset classes, which was also the case in 2011.

One final point to emphasize on future expected returns between bonds and stocks. Bonds have experienced a 30 year period of dramatically declining interest rates. When interest rates go up, bond prices go down. Looking forward, stocks have a much better chance of providing superior returns than bonds, but only for the patient investor. Hopefully that includes you!