The Year of Reconciliation, Part I

Last year was a very difficult year in terms of investment management; very rarely will I speak in extremes, but 2011 could have been the most challenging year ever. There was, and still is, a confluence of factors too divergent to properly quantify. This created an environment of high volatility; so high that tactical strategies had trouble achieving, and subsequently maintaining, investment gains. “Buy and Hold” has its own issues involving behavioral risk.

This industry is marred with contradictions. Our timeframes are too long and, simultaneously, too short. Investors seek to maximize growth and moderate risk. Our focus is divided between the macroeconomic situation and microeconomic considerations, both of which drive portfolio decisions. Returns are benchmarked variably; on an absolute basis or relative basis depending on the particular day and/or perspective.

I’ve titled 2012, “The Year of Reconciliation, Part I,” because those previous contradictions are unsustainable. This year’s market and economic environments will begin to force investors to make some prudent decisions in terms of their type of investment strategy and their portfolio goals. Additionally, 2012 will be the start of agreement and cohesion among economic topics such as: fiscal policy, monetary policy, and the inflation / disinflation / deflation debate. Next year will follow up with Part II. Only when these agreements are mostly in place will volatility subside. With volatility comes opportunity; but that opportunity is short-lived and generally not capitalized upon.

I’m very bullish on equity returns for the first few months of this year. In fact, I think there is a strong possibility for 52-week highs in the S&P 500 before May—which means an increase in equities of about 10% from where they started the year. If that were to happen, the appropriate investment strategy is to become more risk-conscious and preservation focused while waiting for the next opportunity. Making predictions further out in time, while pursuing a dynamic investment strategy in ever-changing, headline-driven markets, is rather pointless. However, economically speaking, there are major hurdles that need to be overcome. The politics of these hurdles will naturally take time—years, in fact. It is my view that a consistent, 5% annual return over the course of the next five years will be a very satisfying return in all respects.

Consistency is critical and preserving gains is paramount.

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