My Investment Game Plan for 2012

by: Ray Merola

It's good to have a plan. Today, I offer my 2012 investment game plan. Following the same general process from last year, I intend to review and submit to SA editors a mid-year and year-end summary on this plan; outlining results and sharing forward adjustments as appropriate.

The plan itself is short and simple. I begin with a set of macro assumptions, and then organize an investment strategy around it.

2012 Assumptions

  • The global economy continues to move forward, but the European wildcard has the ability to create an unusually wide range of growth outcomes. Indeed, the EU debt crisis remains an overhang on the world economy that I find very difficult to handicap. If this issue does not blow up, I believe the economies of the United States, China, and emerging markets will do just fine. In any event, Europe will experience recession. If the EU situation is mishandled (which I think is a significant risk), then a world flat line scenario is likely. That said, I forecast a low likelihood of a global recession in 2012.
  • U. S. interest rates will remain low. Indeed, the Fed has stated their intent to keep rates down. Corresponding inflation will be low to moderate. Banks will continue to mend themselves, but the pace will be glacial. Housing will see spotty recovery. I see no rapid economic expansion until the banks are healthy. However, robust bank health is not part of my 2012 vision.
  • Gold will continue to rise.
  • U. S. equity markets will advance. While I make no numerical predictions on the broad markets, I premise that 2012 will be a reasonable year for overall corporate earnings. Therefore, modest market gains are assumed, though dividends will be a major component of this year's investment return.

My 2012 Investment Plan


The plan is constructed to play to a low-interest rate environment, whereas corporate earnings advance. Given the geo-political uncertainty, a defensive approach is appropriate. This approach leans toward well-run, large-cap stocks with good balance sheets that pay dividends.

Bonds are 2012 placeholders, offering diversification and some income support. Finally, holding some cash is always in style for me.

Premising a modest up-cycle sector rotation, I continue to favor companies that may capitalize upon general economic expansion.

For those who follow my articles, I consider myself an “investor” versus a “trader.” While I do participate in an occasional trade, I generally value invest with a twelve-to-eighteen month horizon, always re-evaluating out to the end of that time line. I like to own a limited number of securities and follow them closely.

In addition, I keep a "shopping list," of stocks that I'd like to own, but are not "on sale" today.

Plan Strategies

Concentrate equity investments in the Industrial, Materials and Energy sectors. This is one of the same strategies I incorporated last year. It produced a mixed bag in 2011. My go-forward rationale is that 2011 was a “lost” year. The economic cycle neither advanced convincingly nor retreated. Typically, business cycles last five to seven years. Last year, I had premised we were entering the expansion phase. This didn't happen, but neither did we fall back into a double-dip recession. Therefore, I plan to maintain an overweight of many of the same cyclical companies as last year.

My favorite Industrials include Caterpillar (NYSE:CAT), Honeywell International (NYSE:HON), and Illinois and Tool Works (NYSE:ITW); these stocks emphasize diversified global giants. Basic Material picks include Nucor (NYSE:NUE), and International Paper (NYSE:IP); both sporting good yields and strong balance sheets. My Energy investments are centered around Royal Dutch Shell (NYSE:RDS.A), Exxon Mobil (NYSE:XOM), and Halliburton (NYSE:HAL); Shell offers a generous yield, Exxon plays to the boom in natural gas, and Halliburton is a beaten-down favorite to capitalize on the need for energy services, especially in North America.

I also like Energy Transfer Partners (NYSE:ETP), a pipeline MLP that offers a generous 7.5 percent distribution yield and focuses upon the Texas natural gas / shale gas infrastructure.

Increase holdings of selected Tech stocks. My two core investments in this area are Apple (NASDAQ:AAPL) and Intel (NASDAQ:INTC). These two represent bookends of this sector: one high growth company and the other a dividend star. I believe both remain undervalued.

Underweight Financials and Health Care. I suspect that the risk-reward profile for Financials will remain weak and volatile. Therefore I will remain largely on the sidelines for this sector. I have small positions in Citigroup (NYSE:C) and Hudson City Bankcorp (NASDAQ:HCBK) to stay in the game. I do like the iShares Preferred Stock ETF (NYSEARCA:PFF) for the high yield coupled with low European bank exposure.

I bailed a bit early on the run-up in Health Care stocks last year. Now I believe the prices are too high to get back in.

Retain moderate exposure to Utilities, Telcom and Consumer Staples, holding current securities. During 2011, I picked up positions in American Electric Power (NYSE:AEP), Vodafone PLC (NASDAQ:VOD) and PepsiCo (NYSE:PEP) when the valuations just got too compelling. I think the price tag on these shares are now too rich to buy more, with the exception of Vodafone. I'll continue to hold and collect the dividends, but won't add to the positions unless they “come in.” Big picture, I'd like to accumulate more Utility / Telcom sector stock to round out my portfolio. However during the EU crisis last year, the field became too crowded with investors flocking to companies with high yield and little European exposure.

Keeps some bonds as a hedge, but basically the party is over. No matter how upbeat or bleak the situation, I try to stay diversified. Now is no exception. Since interest rates are so low, I believe bonds are a washed out trade. I have some good medium-term corporate bonds that I will continue to hold to maturity.

I have exited all bond funds early last year with a few exceptions. I still like the PIMCO Total Return Fund (PTTRX), despite last year's performance and Bill Gross' mea culpa. Rounding out some fixed income exposure, I will continue to hold a Global Bond fund and a High Yield fund to stay balanced in the bond space. The run-up in Treasuries was a pleasant surprise last year, but I don't think it will be duplicated again this year. So I'll take some profits on a TIPS fund.

Increase exposure to Gold: Now. I believe that the yellow metal should be part of my portfolio as a hedge and insurance. I think the dip in gold prices now is an opportunity to accumulate the position on the cheap. Last year, various institutions and investment houses were forced to sell gold to raise cash. Now I see gold continuing it's climb upward in 2012. No silver, copper or mining stocks for me. I will add to iShares Gold Trust (NYSEARCA:GLD) as my preferred access to the precious metal.

Lastly, CASH is king. I tend to hold a fair percentage of cash in my portfolio, and it doesn't bother me to live with today's near-zero interest rates. Holding some cash permits me to sleep easy at night. I simply ladder some one-year CDs, even if the interest rates are awful.

These views are my own. I am not trying to sell anything, nor providing specific investment advice to the readers. Indeed, I simply enjoy sharing / exchanging views with fellow SA investors, based upon my nearly thirty years of practical experience.

Good luck on all your investments in 2012.

Disclosure: I am long CAT, HON, ITW, NUE, IP, RDS.A, XOM, HAL, ETP, AAPL, INTC, C, HCBK, PFF, AEP, VOD, PEP.