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Surprising Lessons of the 2012 Stock Market
were you thinking this time last year, when you evaluated and planned
the investments in your 401(k) plan or your other stock investment
accounts for the year ahead? Did you anticipate the stock market,
as measured by the Dow Jones industrial average, would have a 10.24
percent total return in 2012, including an average dividend yield
of 2.74 percent? Or that the S&P 500 stock index would post a
13 percent return in 2012?
If you didn’t guess correctly, you have a lot of very good, very professional
company. A new report from Goldman Sachs says that 88 percent of hedge fund managers
failed to beat the S&P 500 index last year, posting an average return of
just 8 percent. And that average masks some very big losers!
Let’s make it a little easier by choosing a shorter time period. As Congress
wrangled to a standstill on New Year’s Eve, did you imagine the Dow closing
Friday at 13,435, a gain of 497 points in just the four trading days during which
Congress embarrassed us? Or that by the end of last week the Dow would be less
than 600 points from its all-time high of 14,164.53 on Oct. 9, 2007?
As you watched the crisis in our Congress, did you imagine that just four trading
days later, the S&P 500 would post its best closing high since December 2007 — the
start of the financial crisis?
Yet all of those things have happened, despite the national lament over our political
process. All of this makes the point that the stock market may “predict” the
future, but it is not bound to the present. While we watched television and read
the news about our country’s financial woes, the stock market had already
priced in the current events — and was looking forward to the future.
Either the market was “pricing in” a deal that would be forged to
allow the economy to continue to grow — or the likelihood that no really
significant spending deal would be reached, forcing the Fed to create more money
and credit to keep the economy going. That’s the money that has flowed
into the stock market in recent months, instead of being used to hire new employees
or expand businesses.
But the stock market doesn’t “care” why it is going up — nor
should you. It may not make sense to you at the moment. And there’s an
old saying that the market always fools the greatest number of people. That’s
why you need to understand stock market history, make a sensible investment plan
and then have the discipline to stick to that plan.
Was it any easier to pick individual stocks in 2012 than to forecast the direction
of the entire market? Some smart money investors made a fortune, as even some “stodgy” Dow
stocks had huge gains. The leading individual contributor to the Dow in 2012
was Home Depot (HD), which added 151.31 of the total 886.58 in index points gained
on the year. The greatest individual detractor was McDonald’s (MCD), dragging
down the DJIA by 91.38 points, according to S&P Dow Jones Indices.
Did you invest at this time last year thinking that among the best performing
stocks for 2012 would be the following:
• Pulte Group (PHM), up more than 200 percent, from a low of $6.37 in early
January 2012, to above $19 per share this January. The homebuilder benefitted
from the anticipated rebound in housing.
• Whirlpool (WHR), which more than doubled in 2012 from a Jan. 4, 2011,
low of $47.72 to its current price of nearly $107 per share as a rebound in consumer
spending helped this appliance maker.
• Bank of America Corp (BAC) was the worst-performing bank stock in 2011
and the worst-performing stock in the DJIA. It reversed course in 2012, starting
the year at $5.62 last January, then rising to a current $12.15 a share.
Here’s the thing about picking individual stocks: At the bottom and at
the top, for every buyer there is a seller. That means someone is kicking himself,
or herself, for selling Bank of America at $5.62 a share. And last week someone
decided that price was “high enough” and sold out — to someone
who was willing to buy at that price, believing that the stock would move even
An even better example is the debate over Apple. Highly regarded analysts stand
on either side of the question of whether this is the right time to buy — or
not too late to sell — this popular stock.
Sorting that out can drive you crazy. That’s why this is a good time of
year to remember who you are and what your investment goals are. If you’re
not a “trader,” then you don’t have to worry about your investments
on a daily basis. If you’re investing for the long term, then you can’t
agonize over daily moves.
And you can never think that the market is “too high” or “low
enough” to make an investment. If the pros can’t pick the tops and
bottoms, why should you try? Just stick to your plan of regular investing. That’s
the perfect investment resolution for the New Year.
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