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What We Learned About Investing in 2012: Investment Assessment Survey Results

January 2, 2013
by Jack Reynolds

What did we learn in 2012 that we can benefit from in 2013? For one thing, we can take a look at the results of my 2012 Investment Assessment Survey to see what worked and what didn’t work for investors. These insights are based on my professional expertise and investor responses, 80% of whom are asset owners responsible for managing their individual and/or their family’s assets. It also includes responses from advisers, and although there is some overlap, the findings that I am going to share with you over the next few months are based primarily on the asset owner’s perspective.

This week’s article focuses on investment strategy, which was ranked the most significant factor influencing investor decision-making for the third year in a row. In the months that follow, I will also discuss spending management, since what you spend is as important as what you make. In addition, investors are increasingly recognizing the importance of governance, and I will be discussing intergenerational planning in more detail in 2013. If you would like to read a refresher on spending management and governance, please read my prior articles on spending management and governance (click on the underlined words to read the articles).

Lastly, I would like to thank those of you who chose to complete my survey. Your time and comments are invaluable and very much appreciated.

As we enter the New Year, here are two lessons that we learned about investing from 2012:

  • 2012 Investment Strategies: What Worked and What Didn’t
  • When the Unexpected Happens, How Do You Stay Out of Harm’s Way?

2012 Investment Strategies: What Worked and What Didn’t

In 2012, investment strategy was named the most significant factor influencing decision-making for the third year in a row. However, the vast majority of respondents (70%) were not satisfied with their 2012 investment results. Does this mean that their investment strategy had a nick in its armor? Perhaps, but nearly one third (30%) of respondents were very satisfied with their results. Given the fact that these are very challenging times, this second group of respondents was most likely advisers and/or asset owners who were well advised.

Going back to investment strategy, since investment strategy was ranked the number one factor influencing investment decisions, then why were the majority of respondents not satisfied with their results? Was it their investment strategy or something else? My experience tells me that it may have been something else. Specifically, investors likely had an investment strategy but did not stick with it. Given the fact that it is very difficult to stick with a strategy when the world around you is going awry, this is not surprising. However, investors who stray from their investment strategy, particularly during choppy times, often find that it is a recipe for disappointment.

For assets owners and advisers who tried to outguess the markets, there were several turns of events that made it nearly impossible to get it right:

  1. No one thought that interest rates could possibly decline further so investors generally reduced the duration of their bond portfolios. They purchased more short-term bonds and shunned long-term bonds. However, long-term interest rates continued to decline as the Fed engaged in ongoing “quantitative easing.” This drove up the prices of long-term bonds and investors in long-term bonds ended up coming out ahead.
  2. Investors were caught off guard by the strength of the U.S. dollar. Going into 2012, investors expected the U.S. dollar to be weak due to the growing federal deficit and the Fed’s ongoing easy money policy. Further, investors breathed a sigh of relief over Europe’s fiscal crisis when the European Central Bank (ECB) stepped forward to support the Euro. To the extent that U.S. investors held international assets, they expected a declining dollar to provide a wind at their backs. However, the dollar remained unexpectedly strong and U.S. investors in non-dollar assets got the wind in their face.
  3. Hedge funds in general dramatically underperformed in 2012 relative to long-only equities. If you invested in hedge funds you probably did not lose money, but you probably did not make as much money as you did with your long-only equities. In 2012, the U.S. stock market (S&P 500 Total Return) was up over 15%, whereas many good hedge fund programs were up only about 6%.

When the Unexpected Happens, How Do You Stay Out of Harm’s Way?

Without a crystal ball (click here to link to article) it is nearly impossible to outguess the market. However, when the market has an unexpected turn of events, what can you do to stay out of harm’s way? At the risk of sounding boring, you develop an investment strategy addressing all the Opportunity Classes (see graphic with this link), articulate it, and stay with it. Investors who try to outguess markets often find out the hard way how demonstrably difficult it is to get tactical asset allocation right (such as the ones I mentioned above). If you developed a long-term plan and stuck with it in 2012, congratulations, you likely fared well. If you tried to outguess the market and were less fortunate, here are my recommendations:

  1. Do not sit on mounds of cash. It will be eroded by inflation. Inappropriately high levels of cash can prevent you from taking advantage of opportunities in long-term investments. In 2012 for example, returns for long-only global equities in so-called developed countries were in the neighborhood of 15%.
  2. Do not fire your hedge fund managers because they did not do as well in 2012 as your long-only managers. Hedge fund managers protect investors in adverse markets. The possibility of a down market remains a risk, an environment in which successful hedge fund managers should continue to protect you.
  3. Again, develop a long-term investment strategy, articulate it, and stay with it. Revisit it annually and facilitate its gradual evolution over time.

As always, if you would like to discuss any of these factors in more detail, I would be happy to speak with you at your earliest convenience. Feel free to ring me at 617-945-5157 or send me an email at