You could be forgiven for not knowing about it but 2012 was quite a good year for investment returns.  Goods news rarely makes its way to the top tier of news stories so there is every chance the 2012 results got past many investors.

In 2012 you would have heard or read a lot about continuing problems with European bonds and the on-again off-again debt issues for the United States government.  Those big global headlines easily gained more ‘air-time’ than returns from well-constructed Australian investment portfolios that straddled a rising domestic sharemarket with some quite notable results from some companies.

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 Smokescreen

Amid all the smokescreen of concern that seemed to constantly circumnavigate the world in 2012 were, for some investors, quite stellar returns.  In fact, investment results for 2012, generally, serve to illustrate the long-term benefits of careful, considered, investing.  The 2012 returns also illustrate the benefits of not making knee-jerk reactions with investing.

One thing remains a constant and that is, investment markets do not rise in value without turning down at some point. Excesses in economies such as household indebtedness are always, eventually, corrected as investment markets price-in the associated risks.  Sometimes this is known as ‘corrections’ – as in correcting the price of assets – and there are less frequent periods where price corrections are labeled as a ‘crash’ because of the depth of price declines.

Run for cover?

At times in 2012 and for several years before it would have been tempting for investors to simply sell-up and run for cover in cash or term deposits.  However, as interest rates declined in Australia through 2012, in order to stimulate the economy, the sharemarket responded with price increases in anticipation of at least maintenance of present growth levels.

While for example, the return for the German share market (the DAX) topped 29% compared to the Australian All Ordinaries Index’s 13.47% there remain large impediments in the Euro region as it grapples with high unemployment combined with low levels of consumer and business confidence. These fundamental economic issues dictate that Australian based investors must be careful not to over-allocate to international markets. Similarly, while the Japanese market topped 22% for 2012 that economy remains seemingly comatose with more than two decades of, at best, sluggish growth.

Way back when…

In looking at portfolio allocations to various economies, investors need to be vigilant to changing world dynamics. In the nineties there was a strong, valid, argument that international exposure for portfolios reduced the overall risk to portfolios as it provided a counter-cyclical defence. This meant that, generally speaking, economies were rarely in exact synchronisation and so a slow down in the Australian economy (and market returns) could be offset by growth available in other parts of the world.

In the nineties the international components of portfolios also received a ‘free-kick’ because the Australian Dollar was, on average, declining against major world currencies. This ‘tailwind’ increased the value of the international component in Australian Dollars.

But – the Dollar’s up and the rest of the world is in sync!

However, in 2013, the Australian currency is up against all world currencies and doggedly refuses to descend and give investors a free kick in the international section of their portfolios (and boost Australian exporters’ competitiveness).  Add to this a ‘rest of the world’ economic slow-down and the case for large international allocations in portfolios is hard to justify.

So where does all this leave investors in 2013?

Last year proved that diversification delivers stability in portfolios over the long term. First hand I’ve witnessed diversified portfolios, with maximum share market exposure of approximately 50%[1] of the portfolio, deliver over 15%[2] total return (income plus growth) for 2012. Note that the All Ordinaries Index is 100% shares – it’s a share market index not a diversified portfolio with exposure to other sectors.

Will that be repeated in 2013? In short, it’s most unlikely and it could be that such portfolios revert to single digit total returns.  In the event of a major share market ‘correction’ such portfolios should better withstand the overall impact. While they too will decline, the depth of their decline should be less than the overall share market simply because, unlike the share market itself, diversified portfolios are not 100% allocated to shares.

The good news of Australian investment returns for 2012 hasn’t made it to the headlines of news bulletins and it’s unlikely to. However, you’ll more than likely hear about it next time markets decline.  In the meantime, long-term investors who have resisted the temptation to run for the cover of a 100% cash allocation, fare better both in income and long term growth.

      IMPORTANT – THIS IS NOT INVESTMENT ADVICE

This discussion is not a recommendation for readers to invest in any or all of the specific investments, or types of investments, discussed in this blog. Please do not act to make investments based in this commentary.  This is a general discussion about some aspects of investing and cannot account for all circumstances.

Readers should seek their own professional advice which can take account of their personal financial position and objectives.

[1] Note this includes Australian shares, international shares (max. 10% of portfolio), listed property and hybrid interest bearing securities.

[2] Past performance is not a guarantee of future investment portfolio returns.