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2011 Winners Can Make You a 2012 Loser

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Everyone wants to be a stock market winner. There were some big winners in 2011.

Investors in US TIPS did great. This index tracks U.S. Treasury inflation-protected securities that have at least one year remaining to maturity, are rated investment grade and have $250 million or more of outstanding face value. They were up 13.56%.

Does that seem odd to you? The U.S. lost its triple A credit rating in August, 2011. Do you know of anyone who invested a significant portion of their portfolio in US TIPS?

If you were an investor in almost any segment of the stock market, domestic or foreign, 2011 was rough sledding. With the exception of the S&P 500 (which posted a modest 2.11% gain), all other segments of the domestic stock market were flat or in negative territory.

Many "experts" extolled the virtue of foreign stocks. Too bad. Foreign markets were clobbered in 2011. The MSCI World ex USA index measures the performance of stocks issued by companies located outside of the U.S. It was down 12.21% in 2011. Emerging markets fared even worse, losing 18.4%.

With the benefit of hindsight, the best advice for 2011 investors would have been to avoid domestic and foreign stocks altogether and invest in US TIPS. If you had to pick one asset class of stocks, commercial REITS would have been a good bet. The Dow Jones US Select REIT Index was up 9.37%.

Raise your hand if you received and implemented this advice.

The stock picks of analysts fared no better. In a thoughtful blog, Brett Arends did an analysis of how Wall Street analysts' top picks fared in 2011. He found they lost money and you would have been better off investing in the S&P 500 index. More surprising was his finding that "top 10" analyst picks earned less than the S&P 500 index over the past six years.

It gets worse.

Arends looked at the "most hated" stocks with the most analyst "sell" recommendations. The top 10 of these stocks underperformed the most "loved" stocks by less than 1%.

The overwhelming evidence that no one can predict which asset classes (much less which stocks or mutual funds) will perform well in the future has not deterred the same "experts" from making predictions for 2012. I want to get in on the action so here are my predictions:

1. A majority of investors will continue to believe brokers have the ability to pick outperforming stocks and actively managed mutual funds and to provide guidance on "what is happening" in the market;

2. A minority of investors will cancel their retail brokerage accounts and invest in a globally diversified portfolio of low management fee index funds in an asset allocation appropriate for them.

3. Over time, the returns of the minority of investors described in #2 are likely to outperform those of the majority of investors described in #1.

4. The primary beneficiary of perpetuating the myth that retail brokers and financial pundits can predict the future will be those dispensing this advice. The victims will be those relying on it.


Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published December 27, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.