ISC Financial Advisors Newsletter

 With last year in the rear view mirror, where are we going now?

While 2011 was without a doubt one of the most volatile years in history, when the dust settled, the S&P 500 ended up almost exactly unchanged!

We had the Nuclear Disaster in Japan, the all too familiar financial crisis in Europe, politics as usual, and a downshift in China.

Part of the cause for the violent swings can be attributed to the credit crisis of 2008.  Like elephants, investors never forget.  Each time we got bad news, the media hinted it might be the big event to crash the market again.  Even though the market popped up from 6,500 to well over 12,000, some were more focused on not being fooled twice. 

Consequently, many Wall Street types and even some regular investors had itchy trigger fingers.  The high frequency hedge funds even moved their computers closer to where the internet was in Manhattan just for another few milliseconds of trading speed.

So did all this activity help?  Not to the average investor who maintained a rational investment strategy.  In fact, all the activity resulted in lower returns for the average hedge fund!

Try to remember that there will always be a lot of “noise” in the stock market.  It’s counter intuitive, but once you have a solid strategy in place, the less attention you give it the better.  The hype is designed to sell advertising and generate investment transactions, not to make you money. 

Does this mean you should just make your investments and never make adjustments?  No, but it does mean being aware of the noise will probably improve your investment performance. 

It looks like the volatility will remain as the European Crisis continues to unfold, and hopefully correct itself over the coming years.  After all, saving their neighbors from failing appears to be the less painful option for the bigger economies like Germany and France, and we know self interest is a great motivator. 

We also need to get our fiscal house in order in the US, but there is good news on that front.  Despite the headlines, it does seem like the US economy is slowly recovering.  Joblessness will continue to be a problem, and maybe even get worse.  But companies are holding record amounts of cash on hand for investment, and ready to hire at the first sign that the economy is on the upturn.  Government spending will almost certainly be cut, but this will be less of a blow if we are growing faster.

Finally, China is the 800 lb gorilla in the room nobody seems to be talking about.  They are a unique economy, and have experienced a tremendous run up (many would say bubble) in real estate.  The government leadership has figured this out, and is using what happened in the US as a warning.  As a result, they are forcing the real estate market down, which is having the effect of slowing the whole Chinese growth rate.  That said though, it appears they won’t be going negative growth anytime soon, and even if unpleasant, in the short run, a “soft landing” is certainly better than a crash.    

Bottom line: Having a solid investment strategy for your portfolio is critical, and this strategy won’t change the next time we have a crazy dictator threatening war, or other breaking headline.  With the right amount of risk management in place, you can turn off the noise.  Your portfolio will weather the storms better, which will help you reach your goals. 

Tom Gartner, CFP® is a financial advisor with ISC Financial Advisors in Minneapolis

This article represents opinions of the author and not those of his firm and are subject to change from time to time and do not constitute a recommendation to buy or sell any security, or to engage in any particular investment strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.