The year 2012 is fast approaching. With the new year, comes an opportunity to review your investment successes and failures and adjust your approach and allocations. While you sit down to do this over the holidays, pay special attention to the stock market history and the current macro economic and political trends.

The 3 Major Trends in 2012 That Will Affect Your Investment Returns

It is difficult to rely on the forecasts for the future and typically I advise investors to focus on what is already known. We can always make educated inferences based on the current conditions and this can help us adjust and react to situations as they arise. In this light, every investor should consider the following:

1. The US is on the path to recovery – If you have been following the economic news and indicators recently, you perhaps noticed a general trend emerging. The unemployment rate has started to drop. While many observers tend to be wary of this improvement in jobs situation, I tend to disagree. It is true that the government sector has been shedding jobs even as private sector is adding jobs, it is important to realize that the private sector job creation creates real wealth in the country. Government sector jobs just redistribute wealth. Additionally, there is new activity in the housing market and the consumer confidence is on the upswing. Black friday and the ongoing holiday season has also been positive for the retail sales.

2. Europe is still a mess – I tend to see this as a glass half full situation. We might yet get a sovereign default or two but it is an essential part of the deleveraging ┬áthat needs to occur. When all is said and done, the later half of 2012 will see EU come out of this morass. It will be restructured, with tighter financial discipline and control with Germany and France wielding unusual powers.

3. US Presidential elections – Economic issues are at the fore front of the electoral issues for the 2012 Presidential elections. Jobs, economy and taxes are the key topics that are playing on the voters minds and the candidates are forced to come up with new ideas and keep it in the public discourse. Watch out for tax reforms and greater emphasis being placed on small business growth and job creation. Additionally, the cynic in me expects that the Congress will not be able to pass any radical laws from now till the election. This removes a lot of ambiguity and uncertainty that small and large businesses face, at least for a period of time, and that will allow them more flexibility in making their long term growth plans.

So What Does All This Mean for Your Investments?

Investors are more likely to take “risks” when the economy is coming out of the recession and the sentiment for the future turns positive. Research from Advisor Perspectives shows that small cap stocks outperform large and mid cap stocks in the 1, 3 and 5 year period from the mid point of the recession. If you invest in individual stocks or stock mutual funds you may want to increase your exposure to small cap stocks. Any corporate tax reform will also positively affect the small companies much more than the large companies.

You may also want to reduce your exposure to Europe at this time or resist looking for European stocks to buy. There will be a time sometime next year when European equities become attractive again, but it all depends on how quick and comprehensive the EU reform is.

Shailesh Kumar

Shailesh Kumar

Shailesh Kumar is an Entrepreneur, investor and blogger. He writes about value investing at Value Stock Guide. Learn about the stock market and discover the techniques proven to work best for long term investors for finding appropriate stocks to buy in their portfolio to get superior risk adjusted returns.