2011 Year in Review: Politics, Pressure, and Portfolios

Posted on : Jan 14, 2012 | Filled under : News

Every January, it’s customary to take a look back at the year that was. What were the highlights? What were the “lowlights”? What got us to where we are today? What were the events we’ll always remember?

These events, of course, are unique to each person. But on a national scale, or a global scale, events are shared, and the memory of them is embedded in our collective consciousness. These are the events that make the news—the events that move markets.

From Tea Party rallies to the Occupy Wall Street movement, this has been a year of unrest, both domestically and internationally. Perhaps the most noteworthy and dramatic events took place in the Middle East, as a series of protests, and later, uprisings, swept across several nations. Coined the “Arab Spring”, this loose movement has brought the promise of a greater democratic future for many people, but it’s also caused no small amount of uncertainty, as the world braces itself for the political, social, and economic changes that will come as a result.

The economic ramifications of these events are still being assessed, but the effect on oil prices was almost immediate: from February to April, crude oil rose over 23% per barrel.

More stunning news came out of the Middle East in May, when President Barack Obama announced that Osama Bin Laden, the mastermind behind the September 11 attacks, was killed in his compound in Pakistan.

Unrest was not limited to the Middle East. While discontent in the United States was comparatively mild, the ongoing debate about the national debt, unemployment, unions, and other economic issues have given rise to protests across the political spectrum. The Tea Party continues to protest the involvement of the government in business, while the Occupy Wall Street movement focuses on the excessive influence of business in government.

In August, Standard & Poor’s® (S&P®) downgraded its credit rating of the U.S. government from AAA, their highest rating, to AA+, marking the first downgrade in history. The consequences of this decision are disputed, but the market reaction was immediate: the Dow Jones Industrial Average dropped more than 5% the following day.

What do all these things mean to you as an investor? It’s not an easy question to answer. Taken alone, none of these events caused any kind of fundamental change in the markets. While the Dow did drop after the credit downgrade, it would recoup those losses only a week later, only to fall again and rise again like a child on a trampoline.

It’s the news of events that often cause markets to rise or fall, and then either correct themselves, or continue in the same direction, as the meaning behind those events are better understood. It’s this action/reaction phenomenon that causes so much volatility. While individually, events may or may not have a lasting impact on the market; it’s when they are taken together that the cause for broad market trends are observed. When you take Middle East uprisings, domestic demonstrations, credit downgrades, and the European debt crisis and throw them all together, the result is confusion, uncertainty, and fear. It’s these emotions that create such turbulence.

Consider the S&P 500® index. From January to May the S&P was up 8.43 points, as the country began to wonder if the relative stabilization of the economy meant that our recession fears were over. From June to November, the S&P was down 6.30 points, as the credit downgrade, and concerns about the future of countries like Italy and Greece brought back fears of another global recession. But from the middle of September, as the immediate panic brought on by the credit downgrade began to wear off, the markets began to rise again, slowly but surely.

While studying the markets, I tried to think about what other things in life behave like this. The best analogy I could find was our blood pressure. Many people might think that your blood pressure is nearly constant; it’s low if you’re healthy and high if you’re not. But blood pressure changes almost constantly. It’s lowest in the morning, highest in the afternoon, and can be affected by many other factors. It will be lower at rest, and higher when exercising. Stress can affect blood pressure, and so can food. There is as much daily variability with your blood pressure as there is in the stock market.

Here’s why that’s actually a comforting thing: There’s rarely a reason to stay up at night, worrying about your blood pressure, unless you’ve ignored your health all your life. People who eat right and get plenty of activity—those who practice the fundamentals of living well—don’t usually have to be too concerned unless there are other circumstances involved. Similarly, people who practice the fundamentals of sound investing, like hiring an advisor, can sleep well knowing that they’ve done everything they can to protect and grow their money.

At King Wealth Planning, we are committed to doing everything possible to protect and grow your money. Our goal is to watch the health of your investments with the same diligence, care, and expertise you’d expect from your doctor. It’s our job to provide you all the education, services, resources, and advice that you need to sleep soundly. Your doctor can’t control the daily fluctuations of your blood pressure, and we can’t control the daily changes in the market. We know what last year brought, but we don’t know what this coming year will bring. But what we do know is that by paying attention, by watching carefully, by practicing proper asset allocation through diversification and risk management, we can prepare you for whatever the future holds. If we believe you should hold fast to your existing investments, we’ll counsel you to do so. If we believe you should put your money into cash, then that’s the advice we’ll give you.

We do what’s best for you and we’ll never forget it. That, at least, doesn’t change from year to year.

We believe in the promise of the future, and are aware of the risks of the present. Whatever events occur this year, whether bad or good, we’ll get through them … together.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not ensure a profit or protect against a loss.

The beginning of a new year is always a good time to review your portfolio. If you have any questions or concerns about your holdings, or if you just want to talk, please give our office a call at 408-879-0789.

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