Remember December

Remember December?  It was only a few months ago.  Equity markets had just finished a volatile and generally poor year.  European nations were arguing over how to deal with a mountain of sovereign debt, while the rest of the world fretted over how that debt would affect global markets.

Most market analysts expected further tough times in early 2012. Financial magazine Barron's warned, "For investors frightened by the stock market's volatility in the past six months and tired of worrying about places in Europe once given little thought, 2012 promises scant comfort—at least in the first half."

As an investor, if you had taken that advice and left the stock market, you would have just missed one of the best short‐term equity rallies in recent history. The S&P 500 index was up 12% in the first quarter of 2012, its biggest first‐quarter percentage gain since 1998.  Broader equity market benchmarks also made record or near‐record quarterly gains.

Why the turnaround in markets so far in 2012?  The primary drivers have been signs of economic stabilization in Europe, along with signs of economic recovery in the U.S.  But the most important thing to know is that a few months ago, virtually no one predicted either of those to happen.

This brings me back to my oft‐repeated investment philosophy:  No one knows how markets will perform going forward, because that requires an ability to accurately predict unforeseen events.  Since the future is unknown, it’s best to maintain your pre‐determined asset allocation, in the most diversified and lowest cost manner available.

Market discipline works both ways, of course.  Just as it was wrong to assume the market pessimism of last year would continue into early 2012, it would not be prudent to anticipate that the rest of this year will resemble the first three months.

You can always guess, of course, but experience reveals that isn't a very good investment strategy.   Remember December?