Where to Invest in 2011

Here is a rundown of how the market indexes have fared so far this year through December 10^th .

• Cash: nearly ZERO
• BC Bond Index: 6.06%
• S&P 500 Index: 13.4%
• Russell 2000 Index: 25.6%
• EAFE Index: 6.93%
• Emerging Market Stocks: 12.5%
• Long-commodity Index: 16.4%

But there were a lot of ups and downs behind the numbers. After a good start in the beginning of the year, stocks faltered in April and gave investors the jitters until September. The culprit was the worsening debt crisis in Europe and fears of another global financial crisis. Foreign policy makers acted, investors caught their breath, and the markets took off again in September.

As for bonds, the story is not great. Interest rates are starting to rise and in response bond values are falling. The all important 10-year treasury yield rose from 2.41% in early October to 3.32% on December 10^th. That's a 38% increase!

Investors have been concerned that the Feds buying of bonds in the market, which is supposed to drive rates down and bond values up, is not as effective as it was thought to be.

The PIMCO Total Return fund, the largest taxable bond fund with over $256 billion in assets, saw redemptions of $1.9 billion and lost 1.5% in value in the month of November. That's the first month of net-outflows for the fund in two years. Fund manager Bill Gross said bonds have seen their best days and stocks are the better investment.

Driving the upside for stocks was better than expected corporate earnings. Companies tightly managed expenses (hence the stubbornly high unemployment rate) and faith grew that the US economy would avoid a double-dip recession and stay on track for a mild recovery.

Companies are also hoarding cash. Corporate America's cash on hand hit the highest level in 50 years. Companies are using their cash piles to boost dividends, buy back their shares and make acquisitions of smaller companies. This has been good for stocks of mid and small sized companies.

Finally, economies of emerging market countries continue to grow at a rate of three to five times faster than developed market countries. This has been the driver for another year of solid performance for emerging market stocks.

So what's in store for 2011? It's anyone's guess, but when it comes to stocks, the smart money is on more for the same. Stocks remain the better alternative to cash and bonds, which by many expert opinions are poised for a downturn.

Check in later this week where I'll write about three investment strategies to make money in 2011.

Ray Martin

View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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