Blogs & Comment

Markets: Fourth quarter report

This 2011 progress report on the markets can help you make 2012 a better year for your investments.

(Photo: Getty Images)

Within the next few weeks you will receive your December account statements and be in a position to evaluate your performance relative to what the market had to offer. All you’ll need at that point is some reliable benchmark data, representing a truly valid, investable alternative to the securities you chose for yourself. Read on for that alternative.

Let me start out by saying that if you lost money in equities in 2011, it doesn’t make you a bad investor. We citizens of Planet Earth—in Europe, the Far East, Southeast Asia, Latin America and North America—all lost money on equities in 2011. In fact, you did the right thing if you just hunkered down and waited for the storm to pass, instead of trying to market-time your way out of trouble.

Investment performance appraisal will tell you if you lost way more than the average investor, at which point you can assess your security selection skills, asset allocation, and timing decisions, and become a better investor next year.

Incidentally, the outlook for near-term 2012 is the same as for 2011. In 2011, one economic issue—European sovereign debt—dominated the markets, though the U.S. debt ceiling made a brief play as well. In 2012 I don’t see any catalyst other than European debt. Either a country is declared bankrupt and we move on, or a country is clearly rescued and we move on, but until one or the other occurs I don’t see global equities having any direction other than that worrying flux.

Now to the numbers. The S&P/TSX Composite Index fell 11.07% in 2011. By quarters it was uneven: in the first quarter the benchmark rose 5.01%, but in the second and third quarters it fell 5.78% and 12.61% respectively. The final quarter was relatively better with the market up 3.17%, but all told it was down 11.07% on the year.

The TSX can be broken down into its thirteen sectors, and doing so shows the divergence of returns. No sector had four increases in four quarters, but in 2011 the telecom sub-index gained 17.09%; health care stocks 13.39%; and consumer staple stocks 4.83% to round out the best three. At the other end of the scale, metals and mining shares fell 27.14%; materials stocks 21.81%; and info tech stocks fell 20.39%.

Results were equally dismal around the developed world. Among the 21 most major equity markets, only one ended 2011 in positive territory, and that was the Dow Jones Industrial Average, up 5.53% on the year. The rest of the big markets were in the red in 2011, with the TSX placing seventh-best; the S&P 500 flat (zero annual return) for second place, and the Nasdaq Composite eighth, down 2.67% on the year.

And so it was a bad year for equities, no doubt. Was it as bad for you, or worse? A quick performance appraisal will give you the answer, and how to do things better in the future.

Meanwhile, equities aren’t the only investment tool in the drawer. I follow a number of securities from each of the asset classes—the same securities each year, so I can get a read on how each performs one year to the next. Here’s what I found in 2011:

  • Cash returns 1.92% (one-year annual GIC)
  • Short-term Government of Canada bonds total return average 3.0%
  • Medium-term Canada bonds total return average 5.6%
  • Long-term Canadas total return average 14.0%
  • Bank bonds 4.6%
  • Utility bonds 4.2%
  • Other corporate 4.4%
  • Straight preferred shares average total return 3.1%
  • Floating rate preferred shares -15.3%
  • Power generation income trusts average total return 23.1%
  • Pipeline trusts 34.0%
  • Business trusts 3.2%
  • REITs 24.6%
  • Oil and gas royalty trusts 12.0%

Thus in 2011 the more you allocated away from equities the better off you were. In other words, a bad year for equities doesn’t necessarily mean a bad year for investors. It’s something we can use going into 2012. See you there!