Financial Moves That Worked in 2011 – and Those That Didn’t


wall-streetBy Gregory Zuckerman

A year ago, many experts said to avoid U.S. bonds, hold ample cash and stick with foreign stocks.

Those turned out to be among the worst moves of a surprising investing year.

What happened? European nations saw their debt troubles escalate. The U.S. made little headway addressing its own borrowing issues. And stocks rode a roller coaster, with foreign shares spending most of the year dropping sharply. With 2012 around the bend, more experts are worried about a global economic slowdown.
Jason Schneider
But U.S. stocks showed impressive resilience, and other investments including gold and government bonds turned in boffo performances in 2011.

Here’s a look at some of the financial moves that, surprisingly, worked-and some that didn’t-in 2011.

But first a caveat: Don’t go rushing after last year’s winners, and don’t think last year’s losers are destined to remain in the basement forever-like, say, the Mets.

Winning Moves

1 Betting on Bonds

U.S. Treasurys have been rallying for several years. Yields on 10-year Treasurys-which move in the opposite direction of price-began 2011 at a skimpy 3.3%, sparking many analysts to warn investors to steer clear of these investments.

Bad move. Investors saw gains of more than 15% in U.S. Treasurys in 2011, as prices soared and 10-year Treasury yields tumbled to around 2%. These big gains came despite a summer downgrade of U.S. debt by ratings company Standard & Poor’s and the inability of a congressional panel to reach an agreement to cut the nation’s more than $14 trillion of debt.

U.S. bonds were seen as a somewhat unexpected haven in volatile markets. So was the debt of other nations dealing with debt difficulties, such as Japan and the U.K.

Gary Evans, a former trader and author of the Global Macro Monitor blog, argues that the strength of bonds from these nations may not continue. “The U.S., U.K. and Japan need to get their fiscal houses in order before it’s too late,” he says.

2 Going for Gold

Gold has been a big winner this year, rising 21% so far in 2011. The climb was a continuation of strength for the yellow metal over the past few years, as investors searched for a haven-much as they flocked to U.S. government bonds. Others bought gold as a hedge against inflation.

But it wasn’t easy to make money betting on gold. Shares of gold miners, for example, fell over 8%, as investors fretted over rising production costs.

3 Selecting Energy Stocks

The Standard & Poor’s 500-stock index is down 1% so far this year. But four energy stocks-ONEOK, El Paso, Range Resources and Cabot Oil & Gas-all soared between 50% and 134%. The gains underscored how the U.S. is finding new energy sources in some places, such as New York and Ohio, and how oil prices have stayed high, as demand from China remains strong.

Other areas of strength were tech stocks and consumer-focused companies, such as retailers, notes James Paulsen, chief investment strategist at Wells Capital Management.

“At a time when most thought the consumer is struggling under no real income growth, lack of savings, high debt burdens and no job creation,” says Mr. Paulsen, “economically sensitive consumer shares surpassed most expectations.”

Losing Moves

1 Buying Abroad

For several years, experts have advised investors to buy foreign shares, arguing that growth will be more robust abroad. But foreign stocks have fallen sharply, even in emerging markets that are demonstrating impressive growth. The 150-stock Global Dow index is down nearly 13% in 2011.

The falloff came as foreign central banks and authorities, such as in China, focused on curbing inflation by slowing economies. Because many of these shares began at higher levels relative to earnings than in the past, they had more room to fall.

2 Banking on Banks

After getting shellacked in 2007 and 2008, banks rebounded sharply and some analysts predicted more gains in 2011, some said at the beginning of the year. U.S. banks had replenished their balance sheets and traded at inexpensive levels, the bulls said. Even savvy investors such as Warren Buffett and John Paulson bought bank stocks, such as Bank of America, during the year.

But two of the worst performers of the year were Bank of America, down nearly 60%, and Hudson City Bancorp, down 56%. The disappointments are a reminder of how banks are affected by the slow-growth U.S. economy, and how the ills affecting financial companies around the globe also carry threats for domestic financial players.

Other stocks that cratered in 2011 include former highfliers such as movie-rental company Netflix, down 63% on the year, and solar-module provider First Solar, off 63%.

3 Hoarding Cash

Many financial advisers encouraged clients to build big cash balances in 2011. Many top hedge-fund managers, usually comfortable taking big risks, had more than 30% of their portfolios in cash for large stretches of the year. The move seemed to make sense in a period of volatility for financial markets and confusion about which countries would be affected by the global debt crisis.

But most bonds and stocks are beating the puny returns offered by money-market funds this year, despite all the handwringing about the economy and government debt.

{The Wall Street Journal/ Newscenter}


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