Financial markets limp home
With equity markets as a barometer, there is no clear direction in financial markets as we enter the year end close with thin volumes. Down yesterday, up today, the usual volatility but with a weakening slant over the last two months. In fixed income markets there is no yield of consequence without taking undue risk.
Going into 2012 the question for investors remains "where do you make some darn money of consequence, or at least keep up with what the real inflation rate is if you eat, heat, drive, need health care or send a kid to college". Certainly not in bank deposits, money market funds, or short to medium term treasuries. They're safe, and part of almost any portfolio because of it, but there is no yield. Any bonds of medium to long term duration have potential principle risk if rates begin to move up, and best choice there has been high grade corporates and carefully selected high yield(not real trash) but that's a crowded market already. Preferred stock funds have attractive yields but they will go down hard if there is any rate spike so need to be watched. Various "strategic income" type funds, a mix of government securities, emerging markets debt, and high yield(or various combinations) have and still do offer good yields but they have definitely been leaking of late.
Then we get to equities where perhaps the most opportunity lies, but also quite a bit of risk. The companies with major franchises, strong balance sheets, and 2%-4% type dividends have been recommended by everyone for the last six months so if their bonds are crowded these stocks can only be described as mobbed. Still, they belong in any portfolio. International stocks have really come up lame in the last few months, whether China, Europe of course, or most emerging markets, uncertainty has taken the sheen off of most non-U.S. stocks at the moment. Most investment advisors say you must have a significant international exposure, but there's an argument for just buying those U.S. multinationals with at least half of their income and revenues coming from foreign sources. The transparency and balance are reassuring, and they give you the international opportunity and risk.
Small caps and smaller mid-caps have been a wonderful area to play in recent years, but the risk is high, the homework required is significant, and important variables may not be available to a retail investor. Here, some of the best performances of individual investments by far have been in that area, but so have some of the worst. Sell fast if things begin to fall below a reasonable threshold and then just forget about them is what I try to do, but sometimes double up with mixed results.
For institutional investors, the venture capital markets can be a wonderful opportunity to invest in but that's not available to retail, and by the time they bring an IPO to market the initial value has already been realised and on the IPO open the majority of the value is taken by the mutual fund and pension fund institutions at the outset. Investing in a mutual fund with a savvy manager that finds these opportunities would be great, but finding funds that reliably beat their benchmarks after expenses is not easy.
With gold falling down now and the U.S. economy, while not robust, certainly showing some signs of life(or stability at a disappointing level), equities may do well in 2012.
Finding any outsized return these days is not the goal. Protection of assets and modest but real inflation matching or modestly better returns is. Nothing especially new or of note has been said here. It's simply a reiteration of the challenges that investors have faced in 2011 and will likely continue to face in 2012.
Going into 2012 the question for investors remains "where do you make some darn money of consequence, or at least keep up with what the real inflation rate is if you eat, heat, drive, need health care or send a kid to college". Certainly not in bank deposits, money market funds, or short to medium term treasuries. They're safe, and part of almost any portfolio because of it, but there is no yield. Any bonds of medium to long term duration have potential principle risk if rates begin to move up, and best choice there has been high grade corporates and carefully selected high yield(not real trash) but that's a crowded market already. Preferred stock funds have attractive yields but they will go down hard if there is any rate spike so need to be watched. Various "strategic income" type funds, a mix of government securities, emerging markets debt, and high yield(or various combinations) have and still do offer good yields but they have definitely been leaking of late.
Then we get to equities where perhaps the most opportunity lies, but also quite a bit of risk. The companies with major franchises, strong balance sheets, and 2%-4% type dividends have been recommended by everyone for the last six months so if their bonds are crowded these stocks can only be described as mobbed. Still, they belong in any portfolio. International stocks have really come up lame in the last few months, whether China, Europe of course, or most emerging markets, uncertainty has taken the sheen off of most non-U.S. stocks at the moment. Most investment advisors say you must have a significant international exposure, but there's an argument for just buying those U.S. multinationals with at least half of their income and revenues coming from foreign sources. The transparency and balance are reassuring, and they give you the international opportunity and risk.
Small caps and smaller mid-caps have been a wonderful area to play in recent years, but the risk is high, the homework required is significant, and important variables may not be available to a retail investor. Here, some of the best performances of individual investments by far have been in that area, but so have some of the worst. Sell fast if things begin to fall below a reasonable threshold and then just forget about them is what I try to do, but sometimes double up with mixed results.
For institutional investors, the venture capital markets can be a wonderful opportunity to invest in but that's not available to retail, and by the time they bring an IPO to market the initial value has already been realised and on the IPO open the majority of the value is taken by the mutual fund and pension fund institutions at the outset. Investing in a mutual fund with a savvy manager that finds these opportunities would be great, but finding funds that reliably beat their benchmarks after expenses is not easy.
With gold falling down now and the U.S. economy, while not robust, certainly showing some signs of life(or stability at a disappointing level), equities may do well in 2012.
Finding any outsized return these days is not the goal. Protection of assets and modest but real inflation matching or modestly better returns is. Nothing especially new or of note has been said here. It's simply a reiteration of the challenges that investors have faced in 2011 and will likely continue to face in 2012.
posted by John Borden at 1:06 PM
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