Outlook for 2012: The Right Investment Strategies for Capital Preservation, Income, and Growth
This text is a summary of Doug Fabian’s first quarter teleconference recorded on January 10, 2012. For more in-depth coverage and details, we encourage you to listen to the entire teleconference here. You can also check out more podcasts and resources here.
What does success look like in 2012?
We believe that success in 2012 will be characterized primarily by capital preservation. Protect your assets, look out carefully for risk, and be aware of the potential pitfalls in a tumultuous year. No matter what your goals are, we need to embrace active capital management in a world of often extreme events.
Speaking of extreme events, in 2012, we’ll likely experience some upheaval around the world and in the global financial markets. We’ll see what happens with government intervention in the marketplace, with potential country defaults and a changing American political landscape. I believe this is going to be a volatile, risky year for the global markets.
In 2012, we’ll also get a chance to see how much debt matters. There’s obviously been a lot of talk on this topic, and this year we’ll get to see how much borrowing (in Europe, Japan and here in the U.S.) will affect us.
As we look at the current state of things, it’s interesting to note that the third year of a President’s term typically averages 15% growth in the stock market, but we ended 2011 flat – a big under-performance.
However, we often go through decades where stocks under-perform. From 1928 to 1950, stocks significantly underperformed, and from 1966 to 1980 was a similar cycle. From 1990 to now, we’re in another volatile period of time.
Over the next three years, focus on making sure that your mental psyche and your portfolio are intact and ready for anything. The next three years will be turbulent, but they will also be the buying opportunity of a lifetime for those who are prepared for it, much like September 1982. When going through long-term bear markets, your goal is survival, but as soon as the bear market is over, there are amazing opportunities to be had.
The Big Picture
The challenges facing Europe are immense. Unfortunately, it seems that the main-stream media is not interested in publishing this news and this is going to be a problem for investors. For example, the Greek government has been lying about their finances and they are trying to fix a debt situation with more debt, which, in our opinion, will not work. Even “austerity” measures are not working as planned and we suspect that by March 2012 Greece will default on their bonds, soon followed by other countries in the Euro Zone. A recession is likely coming to Europe rather soon, and it will affect the earnings of U.S. stocks.
Another part of the world that might also hit a rough spot in 2012 is China. China launched the largest stimulus package in the world in 2008 by investing in property and infrastructure. However, real estate prices are starting to fall, and a recession in Europe is going to hit them very hard because of their trade relations. China will likely not go into a recession, but its economy will probably continue to contract and be part of a global economic slowdown that continues into 2012.
The U.S. stock market, in the face of these challenges, is sitting on a ledge and I believe a price correction is almost inevitable. As Europe and China both slow down, the U.S. stock market cannot continue at inflated values. That doesn’t mean that stocks can’t go up, but remember that weakness in other places of the world will affect U.S. stocks and might result in a U.S. market sell-off.
At some point, central banks will try to come to the rescue of Europe. Inflation is the politician’s friend, and deflation is their worst nightmare. Politicians will be asked by their constituents to “fix” the situation when Europe’s problems become critical, and they will likely do so using inflation. This will be a buying opportunity for the smart investor.
Some key areas that you will be wise to watch are gold/precious metals, emerging markets, and U.S. equities. These sectors should the equivalent of an amazing sale and, like any smart shopper, we should take advantage of it when the time is right. Oil is an example of a commodity that I believe is very over-valued right now, and might take a steep plunge in the near future if a slow down in the global economy starts to take hold.
Opportunities for Income Investors
We advise avoiding high yield in the first quarter of 2012. For clients who desire a consistent income from their investments, we are avoiding dividend-paying equities, and investing in safe, reasonable yield fixed-income. We especially like actively managed, fixed-income mutual funds that can’t be replicated by an exchange traded fund (ETF).
We also like intermediate-term duration, fixed-income ETFs. We strongly advise keeping a high percentage of cash on hand, because of the risk in the market and the buying opportunities that we think are coming soon.
Opportunities for Growth Investors
Investment opportunity #1 – Gold. We are going to look to buy gold and gold stocks on weakness. Gold is trading like stocks right now, which means that it is likely to react to a sell-off much as a stock would. If the central banks continue to inflate currencies, gold will continue to rise. Demand for gold out of China and India is waning because of weak economies, and a lot of speculation (and on its heels, panic selling) may soon be coming in gold and gold stocks.
Investment opportunity #2 – Emerging Markets. Timing is going to be key on this, and we plan to buy this market segment when others sell them.
Investment opportunity #3 – U.S. Equities. Technology will likely be a very cheap sector, accompanied by oil services and banking. We are keeping a close eye on all industries for our clients, but these are the key ones on our watch list.
Action Items
Many times investors collect individual investments and vehicles that are outside of their comfort zone and that don’t make sense for their goals. In order for you to reach your goals, you must align your portfolio with your investment realities.
Step 1: Assess your portfolio’s exposure to the European crisis. How vulnerable are you to the problems in Europe and how defensive can you be? You need to be sure that you can protect your capital.
Step 2: Avert the European crisis and implement defensive strategies. Remember that we are focusing on protecting our capital and being cautious in 2012.
Step 3: Secure your income streams and position assets to ensure that your capital is producing low volatility income. We advise not to take excessive risk in the first half of 2012.
Step 4: Be prepared for buying opportunities that are almost sure to come in 2012. Reassess the markets often and be on guard for the opportunities that will be on their way this year.
Remember that this teleconference summary is merely an overview and investment opinions are subject to change with market conditions. We encourage you to listen to my weekly podcast to stay up-to-speed on these issues and read our blog for more information. If you would like more in-depth analysis of what your financial options are, please call our offices at 800-391-1118 so that we can take a look at your portfolio and help you with personalized investment choices that fit your needs.
Sincerely,
Doug Fabian
President, Fabian Wealth Strategies
Fabian Wealth Strategies, Inc. is a registered investment advisor with the U.S. Securities and Exchange Commission. Doug Fabian is a registered investment advisor representative. The information expressed in this seminar is for educational purposes only and should not be construed as a recommendation to buy, sell, or hold any specific security. Consider the risks, fees, and expenses before making any change to your investment portfolio. Please note these investment opinions are subject to change with market conditions.
