Over the past year investors saw a number of events affect the market, from the first ever U.S. credit rating downgrade to the earthquake and tsunami in Japan.
Without the benefit of a reliable crystal ball, it’s impossible to identify all of the factors that will affect the markets in 2012. If history is any indicator, there is a good chance that three factors could dominate headlines in the coming year.
European Debt Crisis- The slowdown of the global economy, which started here in the U.S. at the end of 2008, began to shed light on the true debt burden facing many countries, starting with Greece. Since this time, we have seen the effect the crisis is having on the markets. Continued seesawing between optimism and pessimism for a potential solution will likely contribute to further market volatility in 2012.
Geopolitical Concerns- United States troops are pulling out of Iraq, while tensions with Iran seem to be escalating. The recent overthrow of the governments of Tunisia and Egypt, as well as revolution in Libya and continued unrest in Syria has created questions about the future leadership in these countries. In addition to these situations, a continued slowing of the Chinese economy could affect markets in the coming year.
Political Bickering- If the debt-ceiling debates of 2011 are any indication, the 2012 presidential election year will likely include even more indecision, finger pointing and, most importantly, inaction. Before the end of 2012, big decisions will need to be made regarding the expiration of tax cuts as well as the significant spending cuts set to begin at the start of 2013. These matters alone create a great deal of uncertainty for businesses. If political leaders show an inability to address these issues in a timely manner, it could be impactful.
What to do?
The best place to start is to assess your risk tolerance and investment objectives. Your investment strategy should focus not only on selecting investments, but properly allocating your assets. Proper asset allocation can have a significant effect on the total return of your portfolio.
So, rather than trying to predict what will happen with the factors listed here or any other unforeseen events, start with what you know. Take the time to understand your risk tolerance, investment objectives and time horizon. Once you know this information, you can focus on asset allocation, diversification and investment selection. Having an investment plan in place can help avoid the urge to allow short-term market conditions to derail your longer-term strategy.
Smart401k is a web-based investment adviser providing unbiased advice to help employees invest in their employer-sponsored retirement plans. Smart401k provides service to almost 11,000 clients who collectively have more than $1.5 billion in assets. Individuals receive personalized investment recommendations based on the funds in their plan and support of professional investment advisers available to answer all investment questions. Based in Overland Park, KS, Smart401k can be found at www.smart401k.com.