Peter Lynch once said, “The key to making money in stocks is not to get scared out of them.” 

If you heard that as an investor in 2011, you would have probably replied, “Easy for him to say.” 

We just experienced a year riddled with bad news.  There was a horrific earthquake in Japan.  The U.S. saw its first ever credit downgrade in conjunction with politicians playing games of chicken with our nation’s debt ceiling. High unemployment continued.  The news in Europe was not any better-- it was, in fact, worse. 

All of this bad news led investors to extreme reactions. The month of August alone saw six days where the Dow (DJIA) had market swings of 3 percent or more on both the positive and negative side:

Date Event Dow (points) Dow (%)

8/4/2011

Congress fails to raise debt ceiling

-512

-4.30%

8/8/2011

S&P downgrades US Debt

-635

-5.60%

8/9/2011

Fed announces plan to keep rates "exceptionally low" through 2013

430

4%

8/10/2011

Continued worry overEuropeand possible sovereign debt downgrade(s)

-520

-4.60%

8/11/2011

US Jobless claims hit four-month low

423

3.90%

8/23/2011

FDIC says banks are doing better; number of "problem" institutions falls

322

3.30%

 

So what about 2012? I've heard many of our new clients ask, “Is it safe to invest?” or say, “I don’t want you to buy stock yet – it’s too scary.”

Of course, no one has all the answers. But we feel those who have the courage to invest will be rewarded for their nerves of steel.  Sure there are risks and lots of scary stuff happening, but consider...

The U.S. economy is expanding. The economy continues to grow at a modest rate and barring a shock to the global financial system seems unlikely to slip into recession.

The job market is improving. Job growth has picked up and unemployment claims have fallen.  In fact, many skilled job openings are going unanswered because there is a 4.4 percent unemployment rate for people with a four year college degree.

Emerging economies lead the way. While the developed world struggles with slower growth and mounting debt, emerging market economies continue to shine. China and India are expected to generate half of the world GDP growth in 2012. Despite poor stock returns in 2011, emerging market countries have less debt, falling inflation pressure, great demographics, and most importantly excellent valuations.

Cash flows out of stocks.  Typically, retail investors do exactly the wrong thing at the right time.  If you look at fund flows in and out of stock and bond funds it tells a sad story historically.  Money was leaving stock funds when it should have been going in and vice versa.  That has been happening for the past several quarters, as people continue to buy bond funds and sell stock funds – will they be wrong again?

Housing in the US.  Believe it or not, the affordability of a home is near its all time low going into 2012.  Will that turn the real estate market in 2012?

Investors need to prepare for more market volatility in 2012, but don’t let fear cause you to look back ten years from now to say, “I wish I would have had the nerve to buy when things were cheap.” 

Nick Dalgety contributed to this article.