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What’s ahead for the market in 2012? What hot stocks, or sectors, or investment vehicles should you put your money in? Well, I have the inside dope and I’m going to tell you…
I have absolutely no idea. If we look at the record for all the star pundits of 2011, they have publicly proven that THEY had absolutely no idea either. I mean, look at Bill Gross (Pimco) or John Corzine (MF Global)—all they are is living proof that having a good education, an insider view, and probably a pretty fair IQ can help you lose investors a lot of money and maybe get you a free ticket to jail. But hey, I ask people to trust me on investment recommendations. Gee, I’ll even move your money around for you. So where do I get off?
I like to be able to look myself in the mirror in the morning. Okay, no photographers are ever going to greet me when I get out of my limo (at least I hope so, about the photographers, not the limo), but I do like to be able to answer my phone without fear of enraged clients. So, here’s my best advice—don’t follow the advice of some know-it-all in a custom-made suit. Even if they’re nice. Nobody can second guess the market, but research gives us some pretty good guidelines on what will work, and so did Burton Malkiel in his Wall Street Journal column this morning, and in his great book A Random Walk Down Wall Street.
Ready? I can hear the snoring already. Get rid of your individual stocks, your stupid market timing ideas, your addled day trading schemes, your charting for market moves, yadda-yadda. Buy a portfolio of passively managed index funds. That means, find no-load mutual funds (the kind your friendly neighborhood stock shark, er, broker DOES NOT SELL) pegged to a recognizable index like the S&P, total bond market, etc. (not some goofball index made up by some crazy mutual fund company pitching micro-ETFs), distribute your dough in reasonable proportions based on how much risk you can tolerate, your age, and how soon you need how much of the money, and rebalance once a year. Okay, you can go back to sleep now.
The details on this are that you need to pick a decent mix of the type of investments, and research says you’ll do better if your small-company fund has a value tilt (meaning undervalued or out of favor companies rather than market-darling “growth” companies). But the diversification itself is what balances out the highs and lows (and maybe not the precise kinds of assets, although we try). The rebalancing causes you to sell the good stuff and buy the crap. Or if I were nicer, I’d say that means sell high and buy low, and over the long term, that makes more money. As Malkiel points out, emerging markets, non-U.S. markets, and natural resources have been the crap this year, so take a look at those when you rebalance, if they’re part of your asset allocation plan.
Establish a plan based on good research, stick to it, and rebalance. Some of this stuff will do well in 2012, and some will crash like a ten pound roast falling out of your freezer. That I can guarantee. The key is, more of it should do better than do worse, or at least the whole portfolio (as in 2008-2009) should do less badly than those of your “investment savvy” friends. Write this on your bathroom mirror: If it sounds too good to be true, IT IS. If it sounds about right, cautious but plausible, with a controlled margin for error, well, now you’re in the real world. There’s no tooth fairy, either. Slow and steady, you’ll do fine. Sleep well and happy new year.