Should you buy shares in 2012 or give them the thumbs down?

On many measures shares seem cheap, but another shock could finally cause buyers to 'capitulate'.

After a dismal decade of falling share prices and rising inflation, it looks as if 2012 will be a "make or break" year for millions of savers and investors. Fear has replaced greed as the dominant emotion in global stock markets and there are signs that many individual shareholders are about to "throw in the towel" – or have already done so.

startrader: Coins such as Gold Sovereigns are vat free.

Graham Tapper: Have you heard of the DEAD CAT BOUNCE its what shares do all the time - the optimists among us can never resist the temptation to pick up the cheap, the bad and  the ugly in the vein hope that they have the power to revive the dead cat, the stricken down share; because we are all hard wired to be optimistic. Remember though that you optimists out there have a myriad of alternatives for an "investment". One classic car I traded in 1971 for £185 is today worth £34,675 My first little bungalow purchased in 1975 for £4750 is today worth £240,500

jimmy1952: Why is it that all these fund managers say:  'past performance is no guide to the future' Then go on to quote past performance!

dh48: Well, you can't expect them to quote future performance, can you!

bruce90: If all those finacial experts were so good they would not be employed by others, such as banks. They would start with a small pot and within a short time, by using their finacial know how would be richer than Bill Gates. They are just chancers, usually getting where they are by the family connection and looking good during the good times when it is easy and hiding from sight when things go wrong.

daytona: Ian Cowie: "But perfect market timing is not easy and might not even add much to long-term returns" Rubbish. If you'd chosen to listen to research rather than your usual talking heads (advertisers?)  you'd know that was false. Price is the most important indicator of future returns. Buy something that is historically overvalued and poor future returns are almost guaranteed. Buy something that is historically undervalued and good future returns are almost guaranteed. Chapter 1 of the 2009 edition of the long running Barclays Capital Equity Gilt Study comprehensively debunks the myth that timing is insignificant - "The rather brutal lesson we can glean from the past 10 years is that valuations, rather than macroeconomic conditions, and the progress of corporate profits, are the core determinant of equity market returns. . . Over the long run, equity valuations appear to be the primary driver of equity returns, with economic conditions and profit trends contributing little, if anything, to the overall total return from an investment in equities." The 'time in the market rather than timing' argument about waiting for a poor investment to come good is another widespread myth. It's a line used by salesmen who sell you an investment but lose you capital and tell you to hang on in there. Over a 25 year period, buying something which is 25% overvalued which reverts to mean (ie the long term trend growth) means the annual return is ~20% less than the same investment bought at fair value, and ~35% less than the same investment bought at an undervaluation of 25%. This is the reason that historically, the most successful investment strategy has been value investing.

TheBoggart: I am very bullish about the world economy, but only when the boil that is the Eurozone is lanced. When the break-up begins in 2012, and markets collapse as fears about banking stability grip investors, then is the time to move in and fill your boots. The world economy will prove far more robust than anyone imagined. What is intolerable is uncertainty. So - do not buy any shares until break-up begins or central economic management of the Eurozone is a solid reality, with all the implications for democracy and  individual national sovereignties that will entail.

Michael Ernest Corby: I have managed a large part of my own pension and have generally been overweight in equities: it has paid off. Buy good stocks, hold, reinvest dividends - works. Trying to guess whether ti is a low or high point is futile. The essential requirement, however, is to buy good stocks and to ask oneself the question: do I want to hold this stock for 10, 20, 30 years: and does this stock have such a market? If the answer us "yes" then buy, and top up if and when it seems cheap, and re-invest the dividends. Fashion should be avoided, and occasionally one can be wrong footed when the management change the nature of the company, as with he disastrous policies of GEC once Weinstock left, and BT in the 1990s. As soon as board members, and in particular the CEO/Chairman starts talking clap trap like "if we are not global we are nothing (BT) and starts selling good solid businesses (GEC) (C&W)  it is time to go. Some good long term companies unfortunately get taken over, like BOC, a sad loss. One should attend AGMs, if the board have ideas above their station, then run. I well remember a GEC after the change, there was a marionette announcer who asked for "silence for the board" and they went on stage to trumpets and drums, flashing lights, etc: the were not managers, they had become celebes. ut was the same at BT, and C&W. Also beware rewards that are too easy to attain. I thought about buying R&B but the CEO got too much - there is always the feeling that they will be off and cash in their chips when they think the ride is coming to an end. Beware of top brass that get a lot of press coverage - what are they trying to cover up? They are certainly exposing a massive ego, and probably touting for their next job, and trying to cover a forthcoming poor performance, or both. Any award with "of the year" after it for a CEO should be avoided. Remember sock shop? Or president of a prestigious body, like the CBI should be avoided - remember that once great company Rentokil? Or BT when its chairman went doolally over the Euro. Quite why anyone buys no-hopers like HMV is a mystery. The other thing to avoid are shares where a single person has a large stake, and thinking of taking over the whole shooting match: they will be looking after their interests, not the shareholders. This means that there are not many shares worth buying at any time, at any price, but that there are few which are worth buying any time.

taxedtothelimit: For me 2012 will be the year to buy on the dips in the stock markets. UK and europe is where l will be looking for high yield and value. For growth it will be Latin America and the Far East.

catenaccio: The pessimism of market commentators is weird because, leaving aside emerging markets, stocks are at about 90% of the highs of the 2005-2007 bull market.  What is really irking them is a long period, nearly 15 months, where nothing has moved & the fact that long term buy & hold investors have not yet got back to where they were 3-5 years ago (which is damaging to marketing & investment management business). This inertia in price action, albeit with bursts of activity up & down, is in the face of global civil unrest, natural disasters, EU crisis etc etc. So either the inertia means there is upwards momentum just being held back until things clear a little in 2012-2015 or, & I think more likely,  the 2008-2010 bull market ended in 2011,  the 2011 dips were not the bear market preceding the next bull market but part of the parry-riposte between bulls & bears as Mr Market tells us what's going on, & 2012 will either be more inertia or downwards drift - which could go on for a long time if you buy the new normal thesis - or the big drop, meaning real capitulation & margin call selling time. There are likely to be more macro problems & crises in 2012, & the 2011 price action is not hopeful partly because it was in fact insufficiently negative (except for some emerging markets). This means being defensive, surely. And neither dividend paying equities as recommended by some, nor gold, nor corporate bonds, nor commodities are defensive enough for this market situation, they work only if you believe that 2012 & beyond will be sideways not if you favour an outcome that is more like 2008.

oldtyke: so the only option is cash then at 2%?

catenaccio: As it happens I would say that 2% is not too bad if equities & commodities tank & the future is deflationary.  But I would not be 100% cash, certainly not 100% Sterling or Euro cash. As a Sterling (or Euro) investor my view is that you'll beat 2% in Sterling (or Euro) terms if your portfolio is in international government bonds, meaning predominantly $ & Yen. And leaving aside returns you need to currency hedge given the tendency of Sterling to flip flop not least with political instability & given the uncertainties of the Euro. Put another way, just as in 2008 the way to make money risk free was to benefit from FX shifts through being invested in international government bonds, 2012 or perhaps 2013 will be the same as when the tide goes out it is the Americans & the Japanese who are wearing the trunks.   iShares have an ETF (IGOV) which gives you this defensive exposure across the G7 but with a weighting to US & Japan.  You could add a little bit of additional exposure to German Bunds (Deutsche Bank have an ETF for this), because if Germany leaves the Euro, alone or with others, it's currency will be significantly stronger than the Euro. I don't think this will happen but it's not a bad play. And I'm not keen to bet against Germany as a general rule. The more adventurous would combine an 80% portfolio position in that with a short position emerging markets in the Deutsche Bank ETF which is short emerging markets. Personally, I do not go short in my investment portfolio so am just sticking with the view that Sterling & Euro are not safe havens in 2012 & that if things get tricky what always happen will happen, that is that people will want the $ & Yen & to a lesser extent the German currency.  Meaning, bearing in mind that I'm a Euro investor as home currency, going into 2012 I'm 40%  G7 international government bonds, 17.5% US Treasuries, 17.5% German Bunds & 25% investment grade € & $ corporate bonds. No exposure to equities nor commodities but not short equities though in my trading portfolio I expect to be going short in 2012. All these positions are in ETF of course. I'd be the same in same split if I was a Sterling investor except my corporate bonds would be predominantly Sterling & my German Bunds would be UK Gilts. I would certainly not be more than 50% in corporate bonds nor more than 50% exposed to my home currency if it was Sterling or Euro. For a range of other reasons I hope I'm wrong about 2012 & all goes swimmingly, & am happy for this portfolio to generate 3-4% & even lose capital value if the Euro rises against the $ & Yen, it's just that some day the reverse will be true & I want to be positioned for that & able to flip into equities when the Dow Jones Industrial Average goes below 9,000 again.

silvester: "Had you invested the same sum shortly before the 1987 crash, that £1,000 would still be worth £8,440 today" Why is it then that my pension pot between 1984 and 2007 grew by only 4% p.a? 

pragmatist: Mr Cowie was referring to investment in a particular fund.

whatevernext: "Banks across Europe will be nationalised". Such a sweeping statement is irresponsible. If all European banks are to be nationalised don't hold any shares as the knock-on effect on and destruction in confidence in national economies would be immense and no company would be unscathed. There would be little confidence in governments being able to meet the obligations of so many nationalised banks. There would be massive money-printing and therefore hyper-inflation. There would be a huge effect on political parties too with the existing orders booted out. Economies would take a generation to recover, if ever. In practice indebted governments and the eurozone will print money in a relatively orderly fashion and on a large scale to avoid the widespread nationalisation of banks.

dknight: Just buy shares in high yieding defensive stocks hold them for 5 to 10 years, re-invest all dividends and add to portfolio when FTSE slumps i.e. to  bring average cost per share down In 10 years sell portfolio and buy a Morgan Sports car…simple!

johngreer: How can I, an ordinary member of the public, buy gold without having to pay VAT that I can never get back. What are the advantages/disadvantages of coins (Kruger Rands say).

rupertmja: 2012 will be the year for selling shares and buying gold and silver, if there is any left. Just check out the price difference for ETF and physical. The indicators are becoming more obvious by the day. Right now, I'd say, buy ETF and try to take possession! Then, run fast without looking back.

lifeofabundance: I'm investing in my future now - pension provision AND shares - just by working part-time hours (with a full-time attitude) - the secret lies in Network Marketing with Telecom plus/Utility Warehouse - www.lifeofabundance.co.uk

mowen: Ian, John Newlands comment about £1,000 invested shortly after the 1987 crash maturing to £8,150, and the same amount invested shortly before the 1987 crash maturing to £7,500 seems counter-intuitive because it simply wrong. Let me apply lesson 101 in financial mathematics: During October 1987 the FTSE 100 index crashed from around 2,370 points to 1,730 points. That's a loss of approximately 27%. A simple sum (1/(1-0.27)-1=0.37, if you really want to know!) shows that equivalently, investing after the crash would buy you 37% more units of the FTSE 100 index than before, simply because it was cheaper after the crash. Provided the same proportional strategy for reinvestment of dividends is followed in both pre- and post-crash cases (and it would be absurd to assume otherwise), the final amount will differ by precisely the same 37%. The explanation about dividends causing this is utter nonsense!

johngreer: I am a complete amateur about investing.  I have my reservations about statements concerning the movement of the FTSE.  The companies in the FTSE are obviously the successful ones.  However the less successful ones fall out of the FTSE to be replaced by newcomers.  Buying shares in a FTSE company is no guarantee that it will be in existence in five years.  

crusoeonhisisland: steady-he was talking about investment in a particular stock -F&C-so your 27% depreciation is not valid (unless you checked that stock). Also his example is not so counter-intuitive: investment after the crash did do better, but not by as much as one might have expected. A likely factor I imagine was that the pre crash investment received dividends during the crash which were reinvested at attractive prices. Another would be the odd variations in discount an investment trust like F&C 

mowen: Hi crusoeonhisisland, I think he gave two examples: 1) F&C and 2) FTSE 100. It makes no difference which is picked - they both have an associated dividend stream. My point is valid for both examples. My point is simply this: Once you've lost the money during the crash, it's gone for good; the number of units you can purchase before the crash is less than the number of units after the crash (in both cases above). Dividend income after the crash cannot make the pre-crash portfolio outperform the post-crash portfolio, which is what the report is suggesting. I agree with you that the only discrepancy is that the pre-crash investment will have received dividends during the crash. However I think it highly unlikely that dividend income over the space of 1 month is what accounts for the recovery of the pre-crash portfolio!! The report also attributes the recovery to *long term* dividend income: "…over the long term, dividend income forms an incredibly important component of total returns…", not short term, one month dividend income. Best, mowen.

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