Closing the Book: The 2011 Investment Story in Six Short Chapters

It is human nature to keep track of things by familiar markers and the close of a calendar year, however arbitrary, is a perfect example.  There’s no reset button for investments in January.  Some trends will stay on course into 2012; others may reverse themselves. Before we look forward to 2012 let’s take stock of how we got here.

Chapter 1: Bonds Trump Stock

It seems like bonds are defying gravity at this point.  Entering last year at near record lows for yields, fixed income, as measured by the widely recognized BarCap Aggregate Bond Index, returned 7.8% vs. virtually flat returns for large-cap stocks as measured by the S&P 500. As bond returns continued to levitate, yields deflated to new record levels.  US debt was downgraded mid-year, but markets asserted a strong vote of confidence with double-digit returns for long treasury bonds.

Source: Morningstar, Inc.

Outlook for 2012: Past returns are not a predictor of future performance – that’s what we’re told to say by our compliance officers and in my mind, this disclaimer could not be more apropos. With interest rates telegraphed to remain low, the Fed may delay dreaded rising rates, but the ability to replicate the returns of 2011 will be a major surprise. Diversification away from a traditional mix of government bonds may help, depending on your situation.

Chapter 2: Even Steven

The S&P 500 – a bell-weather for American stocks – was statistically unchanged from a price perspective.  When you add in dividends, the index was up 2%.  You may be feeling a lot more bumps and bruises from the year in stocks than a flat 12-month return would indicate.  Markets had wild swings and Ron Griess of the Chart Store (Hat Tip reports that 2011 was the seventeenth most volatile year for the S&P 500 since 1928.  Perhaps not surprisingly, 2008 and 2009 were even more volatile.  All of this has presented a behavioral challenge for investors with the temptation to time the market or get off the bumpy ride.

Outlook for 2012: As with anything, it is very difficult to predict volatility.  It’s best to plan, though, for more ups and downs.  Volatility seems to come in patches with 15 of the 17 most volatile years for the S&P coming between 1929 and 1939 or between 2000 and 2011.  Managing your investment behavior through allocation planning, regular rebalancing, or the advice of an investment professional is critical to help avoid paralysis or bad timing.

Chapter 3: Bigger Was Better

Returns of large US companies surged ahead of their smaller peers. While large company S&P returned 2%, the Russell 2000, a common index for small companies, was down 4%.  The Dow Jones Industrial Average, even bigger than the S&P as measured by market capitalization, returned 8%.  Still, smaller stocks have outpaced large stocks cumulatively since March 2009 (when using the same indexes).

Outlook for 2012: Many have watched for large companies to outperform due to compelling valuations and diversified revenue sources.  This trend may continue with strong profit margins, cash on the books, and still interesting valuations relative to larger stocks.

Chapter 4: Dividends Earned Their Keep

Dividend-paying companies, especially those outside of the financial sector, rewarded their investors handsomely in 2011.   Dividends fulfilled their promise last year helping both the total return of companies as well as raising interest from investors for their companies themselves.

Outlook for 2012:  We still like dividends for reasons I explained in an October blog post.  Dividend yields are attractive relative to interest that bonds pay across the world.  Furthermore, as more boomers retire and seek a more steady income stream (no small feat in a low-yield world), a strategy that includes dividends may remain attractive relative to their cash-hoarding peers. *Dividends are not guaranteed and must be authorized by a company’s board of directors.

Chapter 5: Growth Zooms Past Value

Returns between growth and value were night and day.  Growth outpaced value across large cap stocks and small cap stocks as measured by the Russell 1000 and 2000 respectively.  Financials, which trailed all other sectors helped to keep value down and healthy profits for growth companies also contributed to their success.

Outlook for 2012: Valuations for both growth and value appear attractive.  When you compare the Price to Earnings ratios of each category, growth stocks may still be priced more favorably.  We recommend a diversified approach to investing with exposure to both growth and value companies.

Source: JPM Asset Management, January 3, 2011.

Chapter 6: US Conquers the World

For many of us, the returns of US stocks weren’t the whole story.  International allocations are increasing portions of investment portfolios.  This isn’t a fluke.  International companies represent an increasing market cap of the world’s stock relative to the states.  Over the last 10 years, international investments almost doubled the returns of US investments (33.4% for the S&P 500 vs. 64.8% for the MSCI EAFE per JP Morgan Asset Management).  Blame for foreign investment woes were most strongly linked to a European debt debacle, Japan’s earthquake natural disaster, and concerns of slowing growth in China.

Outlook for 2012: The world’s challenges are hard to ignore, especially in Europe.  Austerity is a big hurdle for economies to overcome.  Companies have been beat up along with their governments and we believe that longer term there may be compelling opportunities around the world.  The role of international investments in a diversified portfolio remains relevant today in our mind in spite of disappointing recent returns.

In spite of its Cliff’s Notes brevity, this look back helps us to mark our place as we begin to write the book on 2012. 

Do you have questions about today’s investment landscape?  Don’t hesitate to e-mail me at or follow me on twitter @MelissaCenterFP for more of my thoughts on investments in the coming year.


Inclusion of these indexes is for illustrative purposes only.  Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.  Individual investor’s results will vary.  Past performance does not guarantee future results.  The S & P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.  The Barclay’s Capital Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody’s Investors Services, Standard & Poor’s, or Fitch Investors Service, in that order.  The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices.  The Russel 2000 index is an unmanaged index of small cap securities which generally involve greater risks.  The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is any index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal.  Russell 1000: Measures the performance of the 1,000 largest companies in the Russell 3000 Index.  MCSI EAFE (Europe, Australia, Far East):  A free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada.  The EAFE consists of the country indices of 21 developed nations.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Diversification does not assure a profit or protect against loss.  Investments related to a specific sector, where companies engage in business related to a particular industry, are subject to fierce competition, the possibility of products and services being subject to rapid obsolescence, and limited diversification.  Investing in emerging markets can be riskier than investing in well-established foreign markets.  Investing involves risk and investors may incur a profit or a loss, including the loss of all principal.