2011 - strong start, weak finish
From an investment viewpoint, 2011 was a bit of a disappointment for Canadian investors.
Although markets performed brilliantly for the first few months of 2011, markets around the world generally sold off for the balance of the year.
Despite a downgrading in the credit quality of U.S government debt, America was the place to invest as the Dow Jones Industrial Average (DJIA) came through with a solid 5.5% gain for 2011.
Unsynchronized markets
Much to Canadians surprise, Canada was not the place to invest as the TSX lost 11% last year greatly decoupling from the U.S. stock index. Canada's stock index underperformed the DJIA by an incredible 16.5%! Canadian markets were said to be affected by growing fears over the European debt crisis and a slowdown in the Chinese economy which severely cut demand for Canada's commodities. According to a www.advisor.ca report;
"... commodity prices sagged overall in 2011. The Commodity Research Bureau Index fell more than 8%, with natural gas, nickel and lumber all down more than 20%."
The really big picture
Alas, Brittania no longer rules the waves. We are pretty sure about this as Brazil bumped out England as the world's fifth largest economy in 2011.
China was a superpower a few millennia ago and they are on track to be once again the world's greatest economic superpower if current trends continue. China bumped Japan out of second place to third.
Canada by the way, resides in ninth spot.
European debt takes its toll
We can't miss one of the bigger stories in 2011 - the European debt crisis. As a result, other international stock market indices also had disappointing returns. By the end of 2011, the FTSE 100 index (England) was 5.6% lower, Germany's DAX declined 14.7% and France's CAC-40 ended the year down about 17%.
Canada's economy out-performs
Despite a weak stock market, Canada's modestly growing economy was the highest among G10 countries according to another www.advisor.ca report;
"Despite challenges both in Canada and globally, the Canadian economy likely grew 2.3%, close to expectations and not far from its long-run average. Over the latest four quarters, GDP is up 2.4% year-over-year, outpacing not just most major industrialized economies (the U.S. was up 1.5% and the Eurozone 1.4%), but even the 2.1% advance in emerging-market darling Brazil over the same period."
What happened to interest rates in 2011?
Another unexpected surprise in 2011 was the continuing decline in interest rates throughout the year as U.S. rates hit record lows. Record low interest rates allowed more Canadians to afford houses despite rising prices. The Bank of Canada Governor, Mark Carney warned Canadians about taking on too much debt.
Although most stock markets did poorly in 2011, fixed income investments (bonds) did quite well thanks to the decline in interest rates. Bonds are interesting investments because bond prices usually go up when interest rates drop. The Canadian fixed income category went up a very respectable 7.4% in 2011. In historical terms, stock markets usually outperform bonds, but such was not the case in 2011.
Canada's living standard improves
In a first since records were kept, 2011 was a notable year in that Canadians now enjoy a higher standard of living than our American neighbours according to reports from Statistics Canada and the international Monetary Fund.
What does this mean for our investments?
With many stock markets down double digits in the past year, this will be reflected in our year-end statements.. If you haven't had a review for a while, please make an appointment with me to do a thorough portfolio review and see if changes need to be made.
In sifting through many of the investment news stories of 2011, I think business editors missed one of the most important. Canada's stock market suffered greatly even though our economy beat most other nations. I am a great believer in diversification and for those investors who avoided international markets and kept all their money in Canada, they likely did not do very well last year. Although the final year-end numbers are still being tabulated, it could be that some international funds outperformed domestic funds in 2011. A lesson learned is do not put all your eggs in one basket. Keep diversified.
In a down year like 2011, investors will likely be less optimistic reflecting the dour headlines of the day. Journalists and business columnists often target and blame the investment community for poor performance for the past year so be prepared for the annual media onslaught early in 2012. David Chilton, author of the new book, "The Wealthy Barber Returns" is said to have gently chided the news reporters by commenting that journalists have the uncanny ability to predict past performance. Therefore, be prepared to see the usual best of 2011 lists this time of year.
Keep optimistic and try to be in the camp of the "glass is half-full". If you are baby boomer, time is fleeting. You should be in or start to be in maximum savings mode in order to meet your retirement goals. Specifically, this means maxing out your RRSPs and TFSAs. If you are a younger Generation "X","Y" or "Z", disciplined saving of a monthly amount - any amount - may very well be, the most important skill you will ever acquire. Start a $25, $50, $100 or more per month saving/investment plan. See me about starting one.
I am mostly optimistic about the New Year despite a challenging market and economic environment. Overall sentiment is very bearish right now – perfect conditions for being a contrarian and leaning against the breeze. The path of least resistance is rarely a winning strategy. I wish everyone a happy, healthy and more prosperous 2012!
