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Time to put down your crystal ball

February 2012

For investors, 2011 was a somewhat “choppy” year, with numerous ups and downs in the financial markets. Planning our financial fitness for 2012 involves looking at what we can expect from the markets in 2012.

As baseball Hall of Famer Yogi Berra once said: “It’s hard to make predictions—especially about the future.” These words are certainly applicable for anyone wanting an accurate forecast of the investment climate for 2012. Yet we do know some factors that might affect your portfolio in the months ahead.

Strong business fundamentals: In the past year, the European financial situation, the size of the U.S. deficit and the U.S. budget debates tended to overshadow some fairly good news. Canadian and U.S. businesses’ balance sheets were primarily strong, borrowing costs remained low, and corporate profits were good—over the long term, corporate profitability is a key driver of stock prices. Heading into 2012, these fundamentals continue to look positive, which may bode well for investors.

Europe’s debt crisis: Greece’s economic problems made news in 2011, but they weren’t the end of the story in Europe. Italy, Spain, Portugal and Ireland also faced major financial difficulties.

And without definite solutions, don’t be surprised to see intermittent, if short-lived, shocks to the markets.

U.S. election-year patterns: The U.S. stock market typically rises during the year a U.S. incumbent president faces re-election, which is the case in 2012. Coincidence? No one can say for sure whether the pattern will continue. This could affect Canadian markets, since other markets tend to follow those of the U.S.

Instead of trying to predict what will happen in 2012, consider the following tried and true investment strategies:

Diversify your holdings: Spreading your money among a wide range of investments can help reduce the effects of volatility in your portfolio. Keep in mind, diversification alone doesn’t guarantee a profit or protect against loss.

Don’t ignore your risk tolerance: Worrying excessively about market fluctuations might mean you have too much risk in your portfolio. If you do this, consider making changes.

Always look at the big picture: Financial markets fluctuate. But by staying focused on your long-term objectives and making decisions accordingly, you can help avoid overreacting to short-term events.

Just like other years, 2012 will undoubtedly have periods of turbulence. But by making the appropriate investment decisions, you can remain on track toward reaching your financial goals.

Deborah Leahy is a financial adviser with Edward Jones, and specializes in assisting seniors.

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