Where to invest in 2012, or in any year for that matter, does not begin with investment analysis--knowing where to invest begins with knowing how to invest. It begins with asset allocation and the knowledge of how to build a portfolio.
Let's begin our series of Where to Invest in 2012 articles with the disclaimer that predicting the direction of economic and financial market conditions can be a fool's game. Also, a good way to invest for 2012 is not too different than any other year, at least for the majority of investors who have time horizons much longer than one year.
With that said, it is not a stretch to say that 2012 will likely see a continuation of investor uncertainty, anxiety and trepidation that we see now and throughout most of 2011. Perhaps a good way to frame investor sentiment is cautiously optimistic or the glass is half-full. While many people are still without jobs and there are other many weak spots in the economy, the stock market seems to still "want" to go higher. Also, the US economy is weak but still moving forward with about 50% of economists believing we will enter another recession during the year.
Where and How to Invest 2012: Asset Allocation
The best place to begin your 2012 investment strategy is with asset allocation--the mix of stocks, bonds and cash to hold in your portfolio. The reason for this is that asset allocation has a greater influence on overall returns than does investment selection. For example, even a good selection of stock mutual funds will not perform better than a good mix of bonds and cash in a year where stocks do poorly.
With regard to a good asset allocation for 2012, an investor will need to consider a few key points on each asset class:
- Stocks: For stocks to do well in 2012 the European debt crisis needs to stabilize and the fourth year of the US President Election cycle needs to be average. Currently, almost every move (up or down) by the stock market has something to do with the sovereign debt crisis in Europe. Also, the fourth year of an incumbent US President's term is positive by historic standards. Still, it's almost a toss of the coin on the outlook for stocks in 2012. Bottom line: Investors willing to take risk may be rewarded in 2012 with an aggressive portfolio of mutual funds.
- Bonds: For bonds to do well in 2012, inflation and interest rates need to stay low, which may also mean that world economies and financial markets (stocks) are doing poorly. For balance, investors may consider an Intermediate-Term Bond Fund or a Total Bond Market Index Fund or ETF. This way, the complexities and difficulty in navigating fixed income investing can be resolved with diversification.
- Cash: With interest rates near zero, the only practical purpose for cash as an investment in 2012 will be for short-term investors looking for relative safety.
In summary, the easy part of the Bull market appears to be over. To do well in 2012, investors should consider a moderate portfolio of mutual funds to balance the risk of uncertainty with the potential reward of remaining exposed to stocks, bonds and cash.
Also, be sure to check out the Where to Invest series of articles for more details on investing for 2012.