If you invested in a solid mix of stock and bond funds at the beginning of 2012, and didn't peek at them during the stock market stress of the past year, you probably will be delighted when you open your year-end statement from your 401(k) or brokerage firm during the next few days.
Although it has become popular since the 2008 financial crisis to question the wisdom of buying and holding a diverse combination of stock and bond funds, the simple, no-tinkering strategy worked fine in 2012.
It was a year of the unexpected — a year when it looked like Europe and China might send the world into another economic crisis. Yet, ultimately, governments worldwide threw trillions at the problems, and the catastrophes that were envisioned never erupted.
Europe's debt problems have not been solved, but they've been calmed. China is busy stimulating its economy after the Shanghai index slumped 20 percent, and the Federal Reserve is doing the same in the U.S.
Consequently, the best course in 2012 was to turn your back on the nerve-racking news about a eurozone breakup, a Greece meltdown, a China economy thud, a eurozone banking collapse and the U.S. plunging off the "fiscal cliff."
There is an old Wall Street saying that stocks don't plunge on the risks you see, but rather on the risks you don't see — like esoteric mortgage bonds that almost brought down the world's financial system in 2008.
Despite the stock market's rage in 2008 and 2009, stocks were kind in 2012 even though it looked like they would turn nasty as they plunged for a couple of months last spring and, again, on fiscal cliff worries at year's end.
In 2012, a simple investment in a Standard & Poor's 500 index fund would have provided a 14.6 percent return for the year, according to Lipper data. An investment in the full U.S. bond market through the Barclays Aggregate Bond index would have given you about a 4 percent gain. The typical no-brainer fund in a 401(k), designed for people planning to retire in three years at 2015, gained 10.3 percent. And 20-somethings, not retiring until 2050, grew their 401(k) money 14.6 percent on average in so-called target date funds.
Those are no-brainer funds in 401(k)s that invest almost entirely in stocks for people in their 20s, and move away from stocks and into bonds as a person gets closer to retirement.
It was difficult to make a mistake investing in diversified stock funds or bond funds last year, unless you second-guessed yourself and bolted or tinkered.
One money-losing approach involved trying to cling to bets that worked in the recent past but which flopped during the course of 2012. Specialty commodity funds lost about 9 percent, according to Lipper. Energy funds lost 3.5 percent, even though they had soared in previous years as analysts predicted the world was running out of oil. New supplies of oil and gas in the U.S. have been keeping prices down, and recession in Europe and a slowdown of China's growth also played a role.
Gold also failed to provide the Midas touch of the past few years.
The SPDR Gold Trust (GLD) had been climbing about 19 percent a year since the end of 2009, but last year it gained only 6.5 percent. During the past month it has dropped 2.4 percent while the iShares Silver Trust (SLV) investment in silver has declined 10 percent. Investors have been shying away from the precious metals after Federal Reserve meeting minutes suggested the Fed may stop quantitative easing later this year. Some investors have been buying gold and silver to hedge inflation from Fed stimulus.
Investing in actual gold through the SPDR Gold Trust fund last year provided a decent return, but investors who tried to partake in precious metal by investing in mutual funds that invest in gold mining stocks suffered the worst losses of any type of fund, according to Lipper data. Precious metal funds lost 11 percent in 2012.
People who used the negative news about Europe and China to go bargain hunting did especially well in 2012. European regional funds provided gains of 22 percent when they soared after the European Central Bank leader promised to do whatever it took to keep the eurozone from collapsing. And China regional funds rose 16.5 percent for the year after China began stimulating the economy.
In the U.S., investors in U.S. Treasury bond funds could be disappointed in their 2012 brokerage statements when they see a lackluster 2.6 percent gain for the year. That gain will look particularly dull when compared with the 16 percent gain 10-year U.S. Treasury bonds provided in 2011. But the slimmed-down return is a result of interest rates at near historic lows. In the first few days of this year, Treasury bond yields have been climbing sharply from 1.7 percent to 1.9 percent. Although that sounds positive for bond investors, it isn't.
When yields, or interest rates, start climbing, bond funds lose money. You can see the effect in the most recent Lipper data. The average bond fund that invests in U.S. Treasury bonds has lost more than 0.62 percent since the end of November.
Of course, the new year is young, and a move in any investment over a few days doesn't necessarily predict the future. But bond analysts are warning investors to beware of over-relying on bond fund investments if the Federal Reserve does stop its quantitative easing policy — a policy that has caused bond yields to fall and bond prices to soar.
Twitter @gailmarksjarvis
