In a recent interview (11/29/11), Bill Gross of PIMCO, said investors should consider themselves lucky if they can obtain long-term annual returns of 5% over the next several years (either in fixed income or equities). This is in large part due to the growth-restricting debt problems in the U.S. and Europe. On the bright side, 5% would be better than what the S&P 500 has returned over the last ten years. He went on to advocate investors keep their money only in the safest investments, such as high-grade corporate bonds and other solid income producing investments.
There are two things we know for certain going into 2012; first is that volatility is here to stay. Daily moves in the stock market of 1% or higher seems to have become normal. Fixed-income portfolios can reduce that volatility considerably, however, portfolios generating yield higher than the risk-free return should expect price fluctuations which can affect total return. Secondly, continued uncertainty will drive this volatility. Month-to-month job numbers, election speculation, threats of contagion, tax policy, etc., will all contribute to the uncertainty that markets don’t handle very well.
Our advice in the past, the present, and in the future has been and will continue to be that of a fiduciary, which is “stay conservative.” The main thing is to understand the risk associated with the investments you’re in. Choose cash or CD’s if you don’t want your principal to fluctuate. Bonds and various fixed income holdings will generate more yield than cash, but will come with some volatility. Equities and other risk assets should be used only if you are willing to assume the risk of principal loss in return for the possibility of outperforming fixed income.
It is always best to make sure the portfolio matches your direct needs, now and for the future……..not your family members, not your neighbors, not your friends, but your needs. As we say at Windsor, we want our clients to sleep like babies at night, and that doesn’t mean waking up every hour crying.