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Market Update: Jan 7, 2013

John Gorlow | Jan 07, 2013
Year-End Review

Numerous headlines during the past year caused many investors to fear catastrophes that never materialized. For example, a showdown looms in congress over raising the federal debt limit; nonetheless a plunge off the fiscal cliff has been averted for now. And though Europe hardly solved its problems, the euro zone did not break up. As for China’s economy and stock maket , they did not crash.  And as for politics, Obama’s re-election did not sink the stock market. 

Though some predicted the demise of the so called “cult of equity”, global stock markets generated healthy returns in 2012.  Specifically, the total return was 15.83% for the MSCI World Index, 16% for the S&P 500, 17.3% for the MSCI Int’l Developed Index, and 18.6% for the MSCI Emerging Markets Index. Around the world, value stocks out-performed growth stocks and small cap stocks outperformed their mid and large cap counterparts.

Interest rates remained low around the globe for all of 2012. Fixed income securities yielded positive returns. Long-term securities outperformed short-term securities. Lower-quality credits out-performed higher quality credits.  The total return for the Dow Jones US Reit index was 17.5% and 33.4% for the S&P Global ex-US Reit Index, making it a top performer among all asset classes

Commodities had mixed performance in 2012. The Dow Jones AIG commodity Index lost 2.6%. Conversely, precious metals as measured by the DJ UBS Gold Index returned 5.99% making it one of the best performing asset classes in the commodities sector.

A warning about past performance: empirical research informs us that past performance is not an indicator of future outcomes. For example, the S&P semiannual persistence score-card tells us that of the 707 actively managed funds that lived in the top quartile as of September 2010, only 10% were still in the top quartile at the end of September 2012.  And if one looks at longer- term performance, only 5.16% of large-cap funds, 3.21% of mid-cap funds and 5.10% of small cap funds maintained a top-half performance over five consecutive 12-month periods.  But in spite of all the evidence, many continue to lose out because they persist in their belief that past performance and related metrics are vital sources of information when selecting funds, which makes no sense and hurts their returns. 

Clearly, earning the rewards offered by the world’s capital markets does not come from chasing past performance but rather it results from disciplined investment, diversification, and a “smart” efficient philosophy.


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