The Full Motley: 2012 Preview

On December 31, 2011, the market closed the year at 12,217.56, which was approximately 6% up for the year (opening at 11,577.51).  This news made me happy because all year, I had said that the 2011 markets would be up <10%.  Believe me, there were times when I thought I would be off.  More often than not, I expected that the markets would close higher than 10% but a surprisingly slow fourth quarter dashed those higher expectation.  Interestingly, the second and third quarters had most analysts forecasting a down year but, as often the case when taking current news and projecting it too far into the future, their predictions were short-sighted.  The best success is when projecting far into the future, at least a year.  That said, those expectations will not always prove to be true, but they remove emotion from investing, which is often the most common pitfall to trip up investors.

Case in point, my predictions last year were that the stock market would be up less than 10% (as measured by the Dow) and that bonds and gold would suffer great falls.  Additionally, I added an actively managed fund to my portfolio to hedge against the perceived lag of indexing.  As already noted, I was right about the markets going up between 0-10%, but my other expectations were incorrect.

The 12-month return in the Vanguard Total Stock Market Index (Investor Shares) was 0.96% whereas the returns for the PRIMECAP Fund retreated by -1.84%.  This is a testament to the strength of indexing since PRIMECAP is one of the most highly regarded actively managed funds Vanguard has to offer.  Additionally, the Vanguard Total Bond Market Index (Investor Shares) returned 7.56% in the year that I expected bonds to fall significantly.

The following are the 2011 returns for funds in which I am invested or in which I have been invested in the past five years listed from highest (bonds) to lowest return (international):

• GNMA Fund Inv 7.69%
• Total Bond Mkt Index Inv 7.56% (Adm 7.69%)
• High-Yield Corp Fund Inv 7.13
• 500 Index Fund Inv 1.97
• Total Stock Mkt Idx Inv 0.96% (Adm 1.08%)
• STAR Fund 0.77%
• Prime Money Mkt Fund 0.05%
• PRIMECAP Fund Inv -1.84%
• Explorer Fund Inv -1.89%
• Total Intl Stock Ix Inv -14.56%

At this point in the year is when I like to set my strategy for the coming year.  While the Presidential Election adds a great degree of uncertainty to American investors, I recently read that the market is usually positive during election years.  As a result, I am not going to make any changes to my current allocation and maintain my current investment strategy.

As for the market itself, I expect that the Dow will be up over 10% and close above 13,439.32 in 2012.