Lessons of the year #6, 5 and 4: Oil, Bonds and Brokers

Posted on January 3rd, 2012

The next few lessons are ones that will flow right into 2012.

Lesson #6 - Oil may no longer be the easy hedge
Last year oil had a volatile year, as usual, but ended up reflecting market strength vs. causing headwinds for stocks. Apparently, oil is being viewed as a gauge for global strength vs. a cause for inflation.

Historically, oil was used as a hedge for global unrest and for rising inflation. And rising oil prices were an influence that slowed markets due to expected higher costs of production and an additional drain on consumers discretionary spending. While these facts are still true, the market found it within itself to ignore them and look at the glass half full and saw rising oil prices as a validation for demand and evidenced a US rebound.

The lesson? Expect an environment where oil and stocks can both rise on US strength and watch for oil to lead the recovery.

Lesson #5 - US Bonds are still the safest investment around
Despite the unprecedented downgrade in US debt this year, treasuries had a banner year rising outperforming the S&P by more than 10%. And while they had positive momentum going into August, they didn’t really get their jolt until AFTER the US downgrade.

Why? Because US treasuries have always been and seem to continue to be the safest investment on the street. As an individual investor, you can use the iShares ETF, TLT, as a proxy to get exposure to this asset class.

The lesson here is that when looking to take risk off the table, consider vehicles like this. .

Lesson #4 - Brokers can go under and take you with them
Probably one of the hardest lessons to learn this year for some investors was the need to spread out trading dollars to multiple brokers. Yes, I’m talking about MF Global’s bankruptcy and the consequences their clients had to pay.

Without making any direct accusations, it appears that MF will end up being guilty of mixing company and client funds as they scrambled to stay afloat. As a result, when they went under, so did the funds that belonged to many of their clients.

It’s a hard lesson to learn, but knowing the solvency of your brokerage has to be something to consider when choosing who to give your business to.

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