Stock Market Predictions for 2012Posted on: 11 January 2012 by Andrew Stallard
Andrew Stallard says fear and greed will dominate the stock market this year.
It's almost as difficult to avoid New Year predictions at the start of January as it is to avoid tinsel at Christmas. Particularly predictions about the Stock Market. Newspapers are full of experts predicting what will happen to the Stock Market in 2012 and we've been casting our eye over them.
Our first conclusion is to offer you a word of caution when looking at these predictions: in our view these experts fall into two categories; those who don’t know, and those who don’t know they don’t know.
Some Stock market experts will point to charts and statistical analysis as evidence that they know what will happen to the price of shares, but in the words of Warren Buffett, the 'Sage of Omaha', and arguably the World’s greatest investor, “Beware of Geeks bearing formulas”. The simple truth is that in 2012 the Market could rise, fall or stay the same, no one knows.
What's important to you, the investor, is how this affects your investments. And that depends on what kind of investor you are.
To the long term investor, the short term movements of the Stock market should not be of undue concern. Our advice to clients is always that you should only put money in the Stock market if you are prepared to invest for the long term, and by long term we mean at least five years. Shares (equities) have been shown to provide the best return to investors over the long term but they are also extremely volatile (1).
The Stock market may appear irrational and free market capitalism a poor way of arranging our economic affairs and delivering wealth to people; however, there is a parallel with Winston Churchill’s assertion about democracy. Capitalism must be the worst economic system, except for all the others that have been tried. The UK may be in for a difficult 2012 but it will be a hot day on a Cornish beach in comparison to the prospects for the average North Korean.
Looking at it in the worst light, you can argue that the Stock market is driven by two factors, fear and greed. When the economic news is good, the Stock market rises to unrealistic highs and when the news is bad, it falls to unrealistic lows. An endless cycle of boom and bust.
Over the last year with fear in abundance, one of the best performing investments have been UK Government Bonds, although the yields – the rate at which the UK Government pays to borrow money, and hence what it pays to investors, are at historically low levels last seen when Queen Victoria was on the throne (2). When investors are fearful, they are more concerned about the return of their money rather than the return on their money.
Gold, the traditional safe haven for the worried, has also enjoyed a good year with an overall return of 10% in 2011 (3). However even the precious metal is not immune to volatility with a price plunge of more than 8% in a week in December 2011 (4).
So how should the long term investor respond to this manic behaviour? We recommend that most people have a diverse portfolio (designed by themselves or an adviser they trust) which includes cash, Government Bonds, Corporate Bonds, commodities like Gold and Oil and of course equities. The blend you have and the amount you have in each category should be consistent with your attitude to risk and how long you wish to be invested.
So what should you do with your money in 2012? For those already invested in the shares of great companies or held with fund managers they trust, the advice is to hang on and remember in the words of Warren Buffett, “Our favourite hold period is forever” and in the case of those seeking to make a new investment, "Attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
2. Guardian Business
3. Financial Express
4. Telegraph Finance
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