2011 was not an investment market for the faint of heart. As we discussed in an earlier blog posting, this summer’s volatile markets were a real test for one’s true risk tolerance. Yet despite all the ups and downs in the various markets, as has been the case since 1939, the third year in a president’s term was a positive year for the Dow Jones Industrial Average. Remember, however, the Dow is just an index of 30 large industrial stocks. The S&P 500 which is a broader indication of overall domestic market performance was flat, 0.0% for 2011 before dividends. The Nasdaq composite which represents smaller companies and includes many technology companies was down -1.8% for the year.
When looking at international markets, the story unfortunately was not quite the same. Depending on what index or specific country you looked at, there were losses on the low end of -5.5% for the U.K. all the way to -25.5% for the Italian exchange. Suffice it to say, it was a bad year for the international stock markets.
Finally, not to be left out of the volatility party, the bond markets fell prey to the same market moving events as stocks did such as; the Debt Ceiling Crisis, the downgrade of the U.S. government, the European Debt Crisis, and the Fed telling us interest rates were going to remain low through at least 2013. However, bonds had a little better showing as one would expect when the stock market does not perform as well. Depending on the duration (the average time it takes to receive all the cash flows from a bond ) we saw returns of +2.0% for bonds under three years up to +8.5% as measured by Barclays Capital Aggregate Index, a measure of longer average maturity, investment grade bonds.
We hope that 2012 proves to be a little less exciting in terms of volatility but only time will tell us that. What we do know and continue to believe strongly in, is that the right asset allocation will have the biggest impact long-term on a portfolio’s performance.
Wishing you a healthy and happy 2012.