Thoughts on where to focus in 2012

January 19, 2012 Categories: Economic Insights
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Although we human beings draw a clear distinction between New Years Eve and New Years Day – one thing has ended, another is starting – capital markets and the factors that drive them just keep going as if the calendar year hadn’t just switched over. As a result, some of the baggage of 2011 will carry over into 2012. The key is: which baggage is coming along, and which are we leaving behind? And how might advisors and investors want to think about preparing for the journey of investing in 2012?

2012 Economic and market outlook

We don’t have a crystal ball at Russell, but our Strategist Team expects that attention to detail will be key in 2012. Specifically, they forecast that:

  • Europe will have a recession in late 2011 and in 2012, but the U.S. will not be dragged into it.
  • U.S. real GDP will grow 2.5% on a year-on-year basis and the 10-year Treasury yield will end the year at between 2 ½ and 2 ¾ %.
  • U.S. inflation expectations appear to be more firmly anchored near 2% than they were in early 2011.
  • Non-farm payroll employment gains will reach a plateau level between 180,000 and 190,000 jobs per month in the summer of 2012. So, the unemployment rate is expected to fall very slowly during the year.
  • the U.S., along with China, to drive global growth.
  • Asia has potential for strong outperformance if the crisis in Europe is resolved and a global recession is avoided. Japan is likely to be the only major economy to post above-trend growth in 2012.
  • In most Emerging Markets, we believe that enough currency appreciation took place in 2011 to contain inflation and leave room for monetary policy easing in 2012.

Where does this leave advisors and investors?

Investing differently may be key. With the pace and magnitude of changes that are going on in global capital markets, being aggressively globally diversified with respect to regions and strategies will be important.  If your client’s risk tolerance allows for it, consider investing in a more globally diversified portfolio. Diversification does not protect against loss in declining markets, but it may serve investors well during these times of market uncertainty.

Consider being a different type of investor .Given the modest expectations in terms of fixed income and equity returns in 2012, becoming a type of investor who manages toward what they need rather than what they want will be more critical than ever.

Rigorously question your assumptions. Especially your assumptions about your – and your clients’ – appetite for risk. For some investors, the volatility in the market in 2012 may offer exciting buying opportunities at the bottom. Other investors, in contrast, will want to keep a very close eye on the risk in their portfolio – so they’re taking as much risk as they need to meet their obligations in the future, but no more.

Investing is an extremely long-term project

Rome wasn’t built in a day. And neither is a nest egg. Investing requires trust between an advisor and a client. It is our mission to help create that financial security for people.

Editors’ note: A previous version of this post linked to a document that has since expired.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Strategic asset allocation and diversification do not assure profit or protect against loss in declining markets.

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