News Room
Last year was good for investors
What can they expect in 2011?
January 1, 2011

By Eileen Ambrose

Vow to exercise more. Check. Pledge to volunteer for worthy causes. Done. Swear to get organized. Yep.

Another New Year's resolution to keep: Examine your investment portfolio and consider what moves you might want to make in the months ahead.

You could start by reflecting on your investment returns from 2010. In fact, if you have a diversified portfolio of stocks and bonds, you should be in for a pleasant surprise when year-end statements come in.

"It was a good year, better than otherwise expected," says Joseph Battipaglia, a market strategist with Stifel Nicolaus in Pennsylvania. "Just about all investment categories performed well — bonds, stocks, commodities and even gold. The only lagging asset once again was personally held real estate. The housing market had a difficult year, at best."

So, what can investors expect for 2011? And where should they put their money? I posed these questions to a number of market professionals.

Many of them said the economy is expected to continue gradually growing, thanks in part to the Federal Reserve's commitment to do whatever it can to make sure that happens. And the recent extension of the Bush-era tax cuts will add billions of stimulus dollars to the economy this year through a payroll tax reduction and renewed emergency unemployment benefits.

Most predicted another year of stock market gains, ranging from a single-digit percentage uptick to a 15 percent jump in the Standard & Poor's 500 index. Bonds, which have had a strong performance in the past two years, will revert to more modest returns.

Still, market experts warn there is a lot on the horizon to be worried about, including the growing deficit, weak dollar, faltering consumer confidence and the prospect of rising interest rates and higher inflation.

Investors shell-shocked by the stock crash of 2008 fled to bonds and were richly rewarded. The return on high-yield bonds issued by less credit-worthy U.S. companies was about 58 percent in 2009 and more than 14 percent for the first 10 months of last year, according to Baltimore's T. Rowe Price.

But if interest rates shoot up, the price of bonds will fall. Rates already Östarted to inch up late last year.

"We think interests rates will probably continue to trend upward," says Steven Huber, portfolio manager of Price's Strategic Income Fund. Returns on the most popular bonds among small investors — high-yield, Treasuries and investment-grade corporate bonds — will likely be in the low single-digits this year, Huber predicts.

Given the forecast for higher rates, stick with bonds with shorter maturities of no more than five years, says Brenda Wenning, a principal with Wenning Investments in Massachusetts. Their prices will fall less than long-term bonds if rates go up, she says.

As an alternative to bonds, Wenning says she sometimes buys dividend-paying stocks. Those yields are now often higher than what bonds offer. And there's the added advantage that the stock price might appreciate, too. Many market experts are recommending dividend-paying stocks these days.

Companies that pay dividends tend to be mature and don't need to pump every penny of profit into growing the business. These stocks also are less volatile and tend to outperform those that don't pay dividends, says Kate Warne, investment strategist for Edward Jones in St. Louis.

Take the total return of stocks that make up the S&P 500 index going back 10 years from November 2010. Nondividend-paying stocks lost an average of 4.4 percent a year, Warne says. But stocks that paid dividends and increased them over that time posted an average gain of 3.1 percent annually.

Look for companies that have a long history of paying dividends and raising them. That used to be banks before the financial crisis caused many to reduce or suspend dividends. You can still find attractive dividends from energy, health care and industrial companies, Warne says.

This also might be the year for a consumer comeback, after many had been paying down debt rather than spending.

"We have pent-up demand, as we have seen for Christmas," says Doug Ober, chairman of Adams Express Co. and Petroleum & Resources Corp., two closed-end funds in Baltimore.

That should be a boon for shares of department stores and retailers offering higher-quality merchandise at lower prices, Ober says. Deep discount stores will remain weak, he says.

Ober also predicts consumers will start kicking the tires again, making this a good year for auto manufacturers.

"The fleet of automobiles in this country is getting to be eight or nine years old on average," he says.

Ober is less keen on shares of General Motors Co. because of its past bankruptcy, although the manufacturer completed a successful initial public offering in November. Instead, he favors Ford Motor Co. as well as automakers in other countries, such as India and China, that are encouraging their citizens to buy home-brand vehicles.

Indeed, many experts recommend investing in emerging markets, such as Brazil, India and China. Their economies are growing more quickly than that of the United States, and they aren't burdened with deep debt. Their growth also will fuel demand for energy, manufactured goods and basic materials such as copper, chemicals and fertilizers, which should boost stock prices in those sectors.

As these economies develop, so will their middle-class, says Thomas Wilson, senior investment manager with Brinker Capital in Pennsylvania. He suggests investing in industries, such as retail, agriculture and food distribution, that will cater to the burgeoning middle-class of these countries.

The easiest way for small investors to gain access to emerging markets is through a mutual fund or exchange-traded fund that invests in those countries. The Wasatch Emerging Markets Small Cap Fund, for example, invests in companies poised to benefit from an expanded middle-class in developing markets, Wilson notes.

Some market experts recommend that every portfolio should have gold as a hedge against inflation and a falling dollar. Gold is expected to go up with inflation, and maintain its value even if the dollar declines.

J. Michael Martin, president of Financial Advantage in Columbia, says gold makes up 7 percent of his clients' portfolios because of concern of falling currencies here and abroad. He started buying gold five years ago at $480 an ounce and recently traded above $1,400 an ounce. Some predict the precious metal will reach $2,000 an ounce in a couple of years.

But not everyone is sold on gold, at least just yet. Warne of Edward Jones says she remains cautious, noting that the price jumped 29 percent in the past year alone. "It's already run up," she says.

David Straus, senior portfolio manager with Washington-based Johnston Lemon Asset Management Inc., predicts gold could retreat this year to $1,100 an ounce, creating an opportunity to then add it to a portfolio.

You don't have to buy bullion or coins to invest in gold. Instead, you can invest in shares of an ETF that buys the gold and stores it in vaults. "You don't have to worry about storage or the risk of theft," Martin says.