Beacon Financial Strategies Financial Planning NC

Third Quarter 2012 Market Review

In Asset Allocation, Investments, Market Review, The Economy by Chip Hymiller

The equity markets seemed to breathe a collective sigh of relief after European Central Bank president, Mario Draghi, declared that he was willing to do “whatever it takes” to keep the Eurozone together.

Making the commitment to do “whatever it takes” implies that massive bailouts will likely flood European markets with cash, thus easing the pain of the European recession and hopefully avoiding a collapse of the Euro.

Beacon Financial Strategies Financial Planning NCIn response to Draghi’s comments, markets resumed their advancement which began in early 2009.  During the third quarter, domestic stocks gained about 5%, while foreign stocks advanced by nearly 9%.

Over the last three years, investment returns for both (domestic) stocks and bonds have been nothing short of astounding.  On a cumulative basis, the S&P 500 has advanced by about 45%, while many investment grade bond mutual funds have advanced by nearly 20% over the same period.

Of course, it has been a different story for investors of foreign stocks, as they have only experienced a cumulative return of about 6% over the last three years.

So why does it remain appropriate for investors (including all Beacon clients) to have some exposure to foreign stocks?  After all, it seems as though investors have not been rewarded by this strategy.

From our perspective, the answer to that question is twofold and is as follows:

  • From a big-picture standpoint, a significant portion of the world’s growth is derived outside of the United States.
  • From a stock-specific standpoint, there are many well-managed and highly profitable companies that are domiciled outside the United States.

In addition, if history is any indication, avoiding (or selling out of) markets that have performed poorly is an investment strategy that does not work.  If investors had employed this strategy three years ago, they would have exited U.S. stocks and missed out on solid (45% cumulative) performance.

Investing for the long-term in an adequately diversified portfolio requires patience, discipline and a commitment to tolerate periods of underperformance.  Please give our office a call if you have any questions.