Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Ah, the New Year! It’s a time of promise and renewal, of hopes and dreams for great times ahead — except, perhaps, for the short-term economy. If Hollywood made a movie about the 2012 economic outlook, the working title could be “Slow and Slower.”
Financial forecasting guru Bill Gross of the PIMCO investment firm predicts 2012 economic growth in the U.S. will hover between 0 and 1 percent. On “Money Matters,” we’re slightly more optimistic, based on the three factors:
Depending on your outlook, there are two ways to play the market this year. If you think we’ll see slow or no growth, the SHUT index may be an appropriate way to position your portfolio. If you expect higher growth rates, think MED FIT.
SHUT stands for Staples, Health care, Utilities, and Telecom. This is a defensive strategy in which you invest in companies that provide the “must-haves” of modern life – food, health care, electricity, etc. If you think the economy will remain stagnant, this is where you should put your money. During the tech crash of 2000, defensive sectors outperformed “cyclical” stocks — which rise and fall with economic expansion and contraction — by 74 percent. So far in the EU credit crisis, SHUT stocks are doing 20 percent better than the cyclicals.
If you think the economy has bottomed out and a real recovery is likely this year, consider the MED FIT approach – investing in Materials, Energy, Discretionary, Financials, Industrials, and Technology. This is a great way to get in on the ground floor of a recovery. During the initial stages of an economic and market recovery, MED FIT sectors return 39.9 percent vs. 23.8 percent for the SHUT index components.
This year has been a perfect example of differences in economically sensitive stock selection:
As of Dec. 22, the S&P was 3.5 percent lower on the year. Cyclical sectors such as materials were down 15 percent and financials were down 14 percent. Defensive sectors were positive with utilities up 17 percent and health care up 10 percent.
Of course, these investments should comprise just one part of your financial plan. On “Money Matters” we operate on the “bucket system.” The strategies above apply to the money in your growth bucket. We are also firm believers in buying stocks that will generate income in retirement. Keep that in mind as you decide what to buy.
What do you see coming in 2012? Will it be a better year for the economy? What’s your personal financial outlook for the coming year?
– By Wes Moss, for Atlanta Bargain Hunter