Having followed markets for many years, 2011 will go down as one of the most bizarre years.
In terms of economic events, the biggest story of the year was by far the sovereign debt crisis in Europe. The seeds of the crisis were planted in 2009, when European leaders forced Greece to increase taxes and drastically reduce government spending. While the decrease in government spending was an absolute necessity, the way that it was imposed was reckless.
That story has long been forgotten as the wave of “contagion” has now spread to every country in the eurozone.
Many shrewd investors even think safe countries like Denmark are in trouble. Some very sharp investors and economists believe it is too late to save Europe at this point.
Considering that Europe makes up approximately 25 percent of the world’s GDP, U.S. investors are rightfully concerned about Europe’s woes having a huge effect on the U.S. economy.
Nearly every comment and action by every important European leader would produce wild swings in the U.S. markets.
The Dow Jones Industrial Average almost dipped below 10,000 and at its peak went above 13,000. The VIX, which measures market volatility and is often dubbed “the fear index,” was as low as 15 when investors were complacent, and almost breached 50, as investors feared the apocalypse.
The market went through weeks of huge downturns, followed by some of the biggest rallies in years. It was very hard for many investors to stomach, and many could not stomach it in the end.
The Wall Street Journal earlier this year described investors who lost as much as 30 percent of their retirement money this year. Many of the investors sold out and vowed never to invest in stocks again.
How did stocks do for the year? The year is not over yet, but overall the market is up slightly. If investors had the stomach to ride the wild swings, they actually would have made money this year.
However as many famous investors note, a large part of investing is having the gut not to sell when things look very bleak. Seth Klarman, who manages one of the largest hedge funds, noted that the hardiest part of investing is the psychological aspect.
There are lessons from 2011 to be cognizant of for 2012 and beyond. No investor should ever put their portfolio on auto-pilot, but it is best to ignore the day to day news of the financial media. Additionally, investors who cannot stomach a huge temporary loss should not be investing at all.
Unfortunately these two pieces of advice are much easier said than done.
May everyone have a successful investing year in 2012.
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