Investment returns in 2011 were good, bad or no change, depending upon...

Arthur Stein Financial, LLC |

For investors, 2011 was the best of times and the worst of times. If you were on the winning side you were happy, if you weren’t, you weren’t.

“It was the best of times, it was the worst of times, … it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, … - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.” That was Charles Dickens describing the French Revolution in Tale of Two Cities.
For investors, 2011 was also the best of times and the worst of times. Just like the French revolution. If you were on the winning side you were happy, if you weren’t, you weren’t.
Unlike the French revolution, no one was beheaded; although I can think of several Wall Street folks who deserve that fate.
Every year is like that in investing. What’s hard is knowing which investment will win.
Here are the winners and losers for 2011.
Large US Companies (S&P 500)
Small US Companies (Russell 2000)
Long-term Treasury Index
Barclays Capital US Aggregate Bond Index
Muni Bond Index
One-year Certificate of Deposit
Residential real estate*
Source: Wall St. Journal, January 3, 2011, page R2 for all returns except MSCI EAFE and Barclay’s Capital US Aggregate Bond. Those two returns from Morningstar. Stock returns include dividends and price changes. *Residential real estate return through the end of the third quarter.
This year’s winners were bonds and gold. The US Treasury Index increased 30%! The Muni Bond index increased 10.7%. Gold increased 9.6%.
Stocks and residential real estate were losers. The S&P 500 Index increased 2.1%, less than the rate of inflation. The Russell 2000 (small company stocks) fell 4.2%. International stocks fell about 11.5%. Home prices declined by 3.7% through the third quarter.
What does this tell us about prospects for 2012? Nothing, unfortunately. Past performance is no guarantee of future performance. I don’t know of any forecaster who has been consistently correct. There are too many unknowns.
Another problem is the unusual nature of investment returns over the last 10 years. 10-year stock market returns were unusually low (2.9% per year for the S&P 500) and bond returns were unusually high (8.9% for the long-term Treasury Index). Over most 10-year periods, stocks outperformed bonds. Stocks and bonds had the opposite growth patterns the last 10 years.
Do you think bonds will continue to outperform? I would be interested in your comments.