#4: What Worked in 2012

by Wayne Ferbert on January 14th, 2013

#4: What Worked in 2012: Indexing!

Looking back on 2012, it is easy to look back and come up with investments that worked out. That is because MOST every asset class and virtually every stock sector went up in value. You probably felt like you had the Midas touch all year long.
You probably finished 2012 with a lot of confidence as an investor. If you like to trade in individual stocks, you most likely picked a lot of winners. Just remember to ask yourself the question: did all of that stock picking generate any extra return in your portfolio (ie, any alpha)? And was that return worth the extra costs like trading commissions and the time spent on research and monitoring?
Looking back on 2012, for many individual investors, the answer to those last two questions was No and No. The last investing year was a high-beta year. What does that mean? It means that the majority of stocks moved ‘in-kind’ with the markets. As the markets were bid up, the large majority of stocks were bid up.
It also means that the performance of those stocks tended to be closer to the performance of the market or the stock’s sector. By ‘closer’, we mean they tended move in ranges similar to the broad market ranges - WHILE in the past 'normal market conditions', these stocks would not have moved as closely to the broad market ranges.
In fact, if you had just invested in the higher beta stocks in 2012, you would have slightly out-performed the broader markets. The S&P500 High Beta Index delivered 18.2% over the trailing 12 months while the S&P500 delivered 16%.
In other words, it really would have served you well to just invest in the broad market asset classes as opposed to any active managed strategies in 2012. Passive stock investing definitely provided excellent returns (15%+) in 2012 and the best thing about it: your approach was passive. You could have just set your portfolio and forgotten about it.
We have always been advocates of index investing at Buy & Hedge. We were glad to see indexing work so well in 2012 since our portfolios are heavily indexed. However, the last 2-3 months of 2012 definitely saw the overall average stock correlation and beta begin to diverge from the broader markets. The 4th quarter earnings season started to show some weakness in some sectors and we saw some stocks start to diverge from market performance. The markets were flat in that quarter and rarely do we find a flat market with a lot of high beta stocks.
That sets up for an interesting 2013. I have said before and will repeat it here: this first earnings season for 2013 will set the tone for the rest of the year. If the weakness of the last earning season continues and guidance weakens, the rest of 2013 will be hard pressed to even find a gain – much less come close to repeating the returns of 2012.

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