2011: The Money Year in Review
2011 was the year of living dangerously. We are not talking about the 1982 movie featuring a reporter living in Indonesia. We are referring to the turbulent worldwide investment waters navigated by investors. Stocks, particularly those of the overseas variety, fared poorly this year, while lower-risk assets such as U.S. Treasury and municipal bonds in general provided excellent overall returns.
By Bernie Williams, Vice President, Discretionary Money Management
We were surprised that long-term U.S. treasury bonds were the best 2011 performers of the major asset classes that we track. The 10-year achieved a total return of more than 15%, mostly from price appreciation. This sector benefited from a worldwide flight to quality, as investors focused more on the return “of,” as opposed to a return “on,” their money. Although we expect Treasury yields to remain low going into 2012, we continue to underweight this sector in our diversified managed portfolios, because we don’t believe investors are being well paid for the risk of rising interest rates.
We were not surprised that large-capitalization U.S. stocks, high-yield corporate bonds, and tax-free municipal bonds outperformed most other risk assets, such as foreign stocks, so we benefited from our overweight position in these investment sectors. The S&P 500 index’s total return (including dividends) of 2.11% for the year, while only slightly positive, significantly outperformed all of the other major foreign stock markets, most of which were deep in the red.
Primarily because of our view that Europe is entering a recession, compounded by the sovereign debt woes of its weaker countries, we hold our domestic bias going into the new year. We believe the U.S. economy will avoid recession, but its rate of growth may be anemic. We continue to favor both large-capitalization U.S. stocks and high-yield bonds. At a multiple of under 12x estimated earnings for 2012, we believe large U.S. stocks represent good value. We also like the prospects for the high yield bond sector, currently sporting an average yield of more than 8.0%, which we believe compensates investors for the default risk and volatility inherent in these securities.
Although we hope that 2012 will not be a dangerous year for investors, we believe that the volatile markets experienced recently may continue, fueled by Europe’s need to solve its sovereign debt issues. And while volatility is often times unsettling, it can provide opportunities by undervaluing specific investments, particularly for the long-term oriented investor. We will remain watchful of the risks and opportunities that 2012 may provide, and we wish a happy, healthy and prosperous new year to all of our members and investors.
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