2011 was characterized by a risk-on/risk-off investor mentality that resulted in extreme volatility for global stock markets. During sharp flight-to-safety rallies, high-quality bonds (Treasuries) became a safe haven for capital spooked by Europe’s debt crisis and fears of China’s slowing growth.
The huge amount of debt in the developed world continued to drive our expectations about the years ahead, as its inevitable unwinding will be a drag on economic growth and creates risks likely to drive periods of high volatility. For the bulk of the fourth quarter, our portfolios were positioned somewhat defensively as a result.
Remarkably, after all of the volatility witnessed throughout 2011, the S&P 500 index ended the year exactly where it started, with its 2% return coming from dividends. Including small-cap stocks, the market had a performance of about -5.5% in 2011. Globally positioned portfolios have had a return of about -7.9% in 2011. The overall performance of 2011 does not tell the whole story though. In the third quarter of 2011 the S&P 500 declined by 18.3%. Small-cap, international and global portfolios experience a decline of over -20%, indicating a full-fledged bear market for these segments during 2011. The Russell 2000 Index dropped -29.6% from peak to bottom. We believe our portfolios performed quite well considering the dramatic declines in the market.
Gold and silver also had a very volatile year in 2011. There were significant declines in April/May and again in September. Gold experienced declines of about 5.0% and 14.6%, respectively. Silver experienced declines of 30.5% and 31.6%, respectively.
We will continue to invest the fixed income portion of our portfolios in short term bonds. We like the liquidity of short term bonds and the yields they generate. We believe interest rates could go up at some point and we want to be on the short end of the yield curve when it does. The best opportunities seem to be in the corporate sector, where we are seeing yields that range from 3% - 12%.
Clearly, last year took a toll on investment portfolios for the general public. At Winch Financial, we countered market turmoil with relatively balanced positions of about 50/50 equities to bonds. Our mutual fund remained similarly positioned through the end of the quarter and is always poised to go to cash with equities if a lack of bullishness exists or a downward trend occurs.
As we strive to protect your money while helping it to grow, we try to avoid losses. However considering how challenging and volatile 2011 has been, we find that our portfolios have performed quite well compared to the rest of the market.