What investors can expect in 2012

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If you had slept Rip Van Winkle-style through 2011, you'd be awakening now to find that your stock portfolio was much the same as you left it.

Presuming you stayed awake, you endured a volatile year for equities. Market swings were so violent that by the third quarter many investors threw in the towel for a loss. Had they stuck it out, they would have found that stocks — despite all those gyrations — ended flat for the year.

That's past. The new year is a good time to poll market analysts on their outlook and to find out if there are moves small investors should take — or avoid — in 2012.

There's not rousing enthusiasm out there for robust market growth. Many analysts would commit only to being "cautiously optimistic," which seems to leave room for things to go bad. Other professionals plan to boost their stock holdings, but their timing differs — a sign of how difficult it is to read this market.

Daniel McHugh, president of Lombard Securities in Baltimore, says he's moved half his portfolio into cash since the summer. He predicts Europe's debt problems will spark a recession there and further weaken our economy, triggering a steep stock market decline in the first six months.

"It could present us with a wonderful buying opportunity," he says.

But Chuck Carlson, chief executive of Horizon Investment Services in Indiana, says two Dow Jones benchmarks recently traded above their October highs, a signal of a bull market.

"We're raising our stock exposure," he says.

The decision when to jump in or out of stocks, of course, is best left to the pros. Conditions can turn so suddenly that by the time most of us react, it's far too late. The best course for the average investor — as dull as it may sound — is to invest in a widely diversified portfolio of stocks and bonds so your portfolio can better weather ups and downs.

Karen Dolan, director of fund analysis with Morningstar, recommends mutual fund investors also diversify their money managers' styles.

For example, she says, if one fund manager makes a big bet on riskier stocks, you could balance that with a fund manager who sticks to large, stable companies with rich cash flows.

"Regardless of how it turns out, you got your bases covered," she says.

Many of the issues that rattled 2011 markets remain in 2012. The European debt crisis is unlikely to be resolved soon. In a presidential election year, U.S. politicians are likely to be even less willing to compromise to fix our fiscal problems. And China's gangbusters economy is slowing down.

"China is so big. If it slows a little bit, it has a major impact on the markets," says Ellen McGee, portfolio manager with FBB Capital Partners in Bethesda.

And stock market volatility is here to stay for a while. At least by now, "investors are getting used to this volatility," says Kate Warne, investment strategist for St. Louis-based Edward Jones.

Still, this year has many things going for it.

Corporate earnings are strong. Companies have cleaned up their balance sheets. The U.S. economy has grown for nine straight quarters.

"We're in a recovery," says David Berman, an adviser with Berman McAleer Inc. in Timonium. "It is not deniable."

One more reason for optimism: An incumbent president seeking a second term.

"The fact that we have a sitting president running for re-election is positive," says Jeffrey Hirsch, editor of the Stock Trader's Alamanc.

During the Dow Jones industrial average's 115-year history, there have been 19 years when a president ran for another term, Hirsch says. And in 14 of them, the Dow gained ground. And in three of the five years when the Dow dropped, he says, the losses were less than 5 percent.

Hirsch says usually if a president is doing a good job, the market rises during the re-election year. And if president is highly unpopular, Hirsch adds, the market rallies when he's voted out of office.

This year could be an exception. But market experts predict the S&P 500 index, a broad measure of U.S. stock performance, will gain 5 percent to 12 percent this year.

Granted, you want a diversified portfolio, but market experts say there are some areas you might want to emphasize:

U.S.A, U.S.A. This year, large U.S. companies are expected to outperform their international counterparts.

"U.S. stocks are cheap," McGee says.

Plus, analysts say, the economy here is better than many other places.

"It's not robust growth, but it's better than a lot of people give it credit for," says Brad Sorensen, Charles Schwab's director of market and sector analysis in Denver. "The jobless rate has come down. Jobless claims are at the lowest levels in a couple of years. Manufacturing continues to improve."

Among sectors, Mark Luschini, chief investment strategist with Janney Montgomery Scott in Pittsburgh, recommends health care and energy stocks. An aging population means demand for health care products and services will only rise. And the thirst for energy among emerging markets will continue, Luschini says.

The U.S. Supreme Court is expected to rule this year on a challenge to the health care law, including the mandate that consumers buy insurance. Shares of health care companies would rally if the mandate is shot down, Sorensen says.

But Warne, of Edward Jones, advises investors to rebalance their portfolio, which means putting more money into international stocks that performed poorly last year.

Dividend-paying stocks These have come into favor in recent years, and some investment experts are recommending them again. Mature companies that don't need every penny to fuel their growth tend to pay dividends. Their stock price likely won't skyrocket, but investors are rewarded with cash dividends.

"The dividends help people stay invested in times of volatility," Warne says. She advises looking for companies that have a long track record of raising dividends regularly.

Bonds The big threat a year ago was the prospect of rising interest rates that would pummel bond holders.

But rates not only remained low — they actually fell during the debt ceiling debate last summer when politicians took the country to the brink of default. Even as yields dropped, investors fled to the security of U.S. Treasuries. The yield on the 10-year Treasury has been running about 2 percent.

"Treasury yields are abysmally low," says Janney's Luschini.

For the risk-averse who seek a higher yield, he recommends high-quality corporate bonds that offer a yield of 3.5 to 4 percent.

And for investors who can handle more risk, he suggests high-yield or so-called junk bonds with an 8 percent to 9 percent yield. The default rate on these bonds is near historic lows, Luschini says, although a downturn in our economy could change that.

Bonds have had a strong run. Warne says long-term government bonds have outperformed stocks for the past one, three, five, 10, 20 and 30 years.

Historically, though, stocks outshine bonds. Some experts worry that investors might be holding too much in fixed income, and forget that bonds carry risks, too.

eileen.ambrose@baltsun.com

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