A Great Investing TIP

Posted on December 2, 2011 at 5:11 PM PDT by

U.S. investors seem fixated on the S&P 500 and the Dow, as if they’re the only indicators that matter, when discussing the stock market. “Oh boy, the Dow was down over 300 today!” is a common refrain. But investing is not a one-horse race; there are many other asset classes that are of interest. In the homestretch of 2011, with one month left to go, here’s a look at some of this year’s results.

We all know that the gold bugs are crowing like crazy because their beloved metal is up over 22.5 percent. But guess what is number two? A big surprise! U.S. treasuries that will indemnify you against the rages of inflation, also known as TIPS (Treasury Inflation-Protected Securities), are up 13 percent this year.

As of Wednesday’s close, the S&P 500 is about dead even with where it started this year. Smaller companies are down about 1 percent. It has been a wild ride to be sure, but no return has been made owning U.S. companies. Similarly, all the chatter about running out of oil seems to be lost on stock prices. Global energy stocks have been up and down, but they remain flat for the year.

U.S. bonds are up about 7 percent including dividends. Even though we are printing dollars like there is no tomorrow, U.S. treasuries are still considered the safest in the world. Imagine that—the same bonds that have been spat upon by the media for 11 months are generating incredible returns this year.

The 28 emerging market economies have been the worst performers. China, India, Brazil, and Russia are down over 15 percent, giving back last year’s gains of 15 percent. The more mature foreign developed economies, including Canada, Europe, Japan, and the rest of Asia, are down about 10 percent this year. This is largely because the greenback has been appreciating against other currencies. You’d never think that listening to CNBC and the media!

U.S. real estate is up about 4.5 percent, but foreign real estate is down about 10 percent. That’s a big swing and speaks to the problems in the credit markets outside the United States because investors worry that landlords won’t be able to refinance their debt.

Since no one knows which way any of these markets will go next year, we continue recommending portfolios containing all markets and asset classes, in proportions specific to the individual. Our investors are trimming their gold and TIPs and adding to their foreign stocks. We are buying low and trimming high, anticipating that this year’s winners turn into next year’s losers.

As this year ends, you’ll start reading about all the managers who “outperformed their benchmarks,” but statistically, most will fall off the radar in the next year or two. As time goes by and capitalism works its magic, we make money by keeping our fees low with exchange-traded funds (ETFs) and tuning out the noise. ETFs avoid the unnecessary and hidden risks often found in active management, such as hidden leverage, quantitative algorithms predicting market moves, quirky money managers, conflicts of interest, and managers placing large bets with your money.

With one month to go, the markets haven’t yet spoken for 2011. But so far, those U.S. bonds that everyone has forsaken will either win, place, or show in this multi-horse race.