Shaping a Portfolio for 2012: mid-year review

2012 strategy

The year is half over.  It’s time to look at the basic portfolio strategy put in place on January 1st, see how well it did and make mid-course corrections.

The relevant Strategy posts are:  Shaping a Portfolio for 2012:  general, and putting the pieces together.

In brief, I thought:

–plus 10% for the year would be a good performance for the S&P 500

–volatility would be high, caused by the evolution of the EU financial/identity crisis, with Europe possibly following Japan down the road to ultimate economic and stock market irrelevance

–emphasis should be on the US, where broadening and deepening of economic recovery would make it important to emphasize technology, domestically-oriented companies and WMT customers rather than TIF clients.


How has that worked out so far?

Overall the strategy has been a reasonable guide.  Through July 3rd, the S&P is up 9%, making it a star among world equity markets.  WMT is up 18%; TIF is down 19%.

where I was wrong

Volatility has been greater than I’d expected.  I would have preferred daily fluctuations around a more or less steadily rising trend.  Whe we got instead was a sharp advance through March, an equally sharp fall through early June, and then a bounceback.

The EU may not be such a lost cause as I had expected.  In January I thought that the EU-as-the-new-Japan was both the most prudent course to plan for and the most likely outcome, given the immense power of the status quo.  I now think there’s hope for a better future for the EU, although decline-into-irrelevance is probably still the most prudent planning stance.  The difference?  I’m tempted to add one or two more EU-listed stocks to complement the IHG I already own.  I haven’t started looking yet, so I have no idea which names.  The general idea, however, would be to have companies domiciled in the EU but with much of their business elsewhere.

Emerging markets in general, and China in particular, have been weaker than I’d expected. Emerging markets are normally boom or bust affairs.  This time around, it’s taking these economies longer than I’d thought to reach an even keel after the boom of a couple of years ago.  Their next day in the sun may not dawn until 2013.  The result may be weaker commodities prices until then.  Another plus for consumers worldwide.

The effects of GDP weakness elsewhere has taken a greater toll on US industrial growth than I had figured.  The current slowdown in the US has to be the most important development I didn’t anticipate.

where to from here?

My thoughts are more in the category of fine-tuning rather than a complete overhaul.

–the S&P 500 has already achieved my admittedly conservative objective for the full year.  I think this means it’s time to become somewhat more defensive.  To move significantly higher from here, investors have to be able to envision reasonable earnings growth coming in 2013.

For now, the election (no one in Washing ton seem to me to be up for the task of addressing the current economic challenges the US faces–but this is usually the case) and the “fiscal cliff”  (the idea that currently-mandated spending cuts and tax increases will clip 4% from next year’s GDP, sending the country back into recession) stand in the way of imagining a happy outcome.

–This means that beneficiaries of innovation and structural change–traditional growth stocks–will likely be the second-half winners.  I’ve begun to think that the major cellular operators in the US, especially VZ, are particularly interesting.

–dividend-paying stocks continue to look attractive to me, despite their being expensive relative to recent history.  High current yield isn’t enough, however.  Dividend growth is an increasingly important issue, since simple bond-like high yielders have long ago been picked over.

–I’ve also begun to look at REITS that concentrate on major cities in the US, as a supplement to the hotels I’ve been advocating for some time.  The idea is that cities like New York and San Francisco are hubs of tech innovation.  They also draw considerable buying interest from foreigners  And their own economies are on the rise again.  I own SLG.  It has some warts, though–mainly its dependence on the finance industry tenants–so this one has a handle-with-care label on it.

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