#5: What Worked in 2012

by Wayne Ferbert on January 10th, 2013

We are launching a series on our site over the next 2 weeks: The Top 5 Things that Worked in 2012 and the Top 5 Things that didn’t work. We’ll count them down each day.
Today, we are looking at the top investments/strategies that worked in 2012. #5 on our list – Investing in International Markets.
International Markets were among the biggest winners in 2012 - in particular, finishing strong in the 4th Quarter. Whether you invested in Developed Markets (like Europe) or Emerging Markets (like China), you should have found success in 2012.
If you look at the nine traditional asset classes (as tracked and reported by JP Morgan Asset Management), you will find that the MSCI Emerging Markets and the MSCI Developed Markets indexes finished 2nd and 3rd respectively in 2012. Only the REIT category, with a 19.7% return in 2012, out-performed these two International indexes.
How well did they perform? The MSCI Emerging Markets index delivered 18.6% returns while the MSCI Developed Markets Index came in at 17.9%. This compares favorably to the S&P 500 at 16% for the year – in what was certainly a banner year for US stocks.
But you had to make sure you were invested in this category to receive these kinds of gains. The trail end of 2011 was a difficult time for International markets. Remember the European debt crisis that bloomed at its peak in August 2011? It was difficult to be a disciplined investor and stay invested in this category expecting a comeback.
But the International Markets delivered. In fact, in the 4th calendar quarter of 2012, each of these two International indexes were up around 6%. In other words, the 4th quarter really put these indexes over the hump to deliver better year-end returns than the S&P 500 for the year. In the 4th quarter, the S&P 500 had no gain.
So, you had to stay committed to this asset class for the whole year to see all of the gains. In 2011, these two indexes were among the 3 worst performing asset classes. But this is the periodic dance that asset classes perform. The losers in one year are often a winner in the next year.
We went back and looked at the last 10 calendar years to see how often the worst three losers rebounded to be among the top 3 winners in the next year. Out of 27 possible rebounders, we saw a bottom three loser become a top 3 winner 8 times.
More interesting, when you examine the times that an asset class delivered NEGATIVE returns one year, it rarely delivered negative returns the next year. In the last 10 years, there have been 13 times that an asset class had negative returns in the calendar year. In all but 3 of those occasions, the next year, the returns in that asset class were positive.
International was negative in 2011. International certainly had that feeling coming in to 2012 that a rebound was possible. Indeed, the investor that stayed committed and re-balanced the portfolio to stay committed to International was rewarded!

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