You've heard the phrase "past performance is not a guarantee of future returns" so often that it has probably lost its meaning. But it's a good reminder as you look ahead to next year's money plans.
"This was an extraordinary year for stocks. Nobody expected them to be up 20 percent by now. But it was a very treacherous and challenging time for the bond market," says Jonathan Lewis, chief investment officer of Samson Capital Advisors. But he says markets "were largely detached" from outside economic factors this year, and he sees that disconnect as worrisome.
One big difference for 2014: Investors can plan for the next year without immediate worries about the "fiscal cliff" they were facing at the start of 2013. But the coming year also promises a continuation and perhaps an escalation of Washington's budget battle, a chance that the Federal Reserve will let interest rates go higher and concern over a stock market already at record highs.
So how can you invest in such uncertain times? Here 14 ideas from investment firms and advisors on what do in 2014.
1. Take a fresh look at income investments. After an exodus of more than $100 billion from bond funds so far this year, Robert Tipp, chief investment strategist of Prudential Fixed Income says, "People are giving up on a lot of potential income." That doesn't mean investors should jump back into long-term government bonds. But mutual funds made up of high-yield bonds can do well in a stronger economy. With rates still uncertain, most strategist advise staying in short- to medium-term bond funds (those that describe themselves as "low duration").
2. Make decisions that take new tax changes into account. The top tax rate has gone up to 39.6 percent on income. It kicks in on incomes above $400,000, and a new Medicare tax of 3.8 percent on investment income starts at the $200,000 level. "I don't think investors have fully absorbed these tax changes yet," says Vern Sumnicht of wealth advisory firm Sumnicht & Associates. Get professional advice on the complex tax code, Sumnicht says, but he warns: "Allocating investments purely for tax purposes is not the best economic idea unless you have a tax problem."
3. Prepare for a weaker dollar. The dollar has remained relatively stable this year, but the long-term downtrend might resume. Samson Capital's Lewis, a currency specialist, says 2014 will be a "weak dollar environment" due to a sluggish economy and still-low interest rates, which points to "commodity-friendly" investments and stocks of companies that earn income from abroad.
4. Rebalance in a way that reflects today's market. Maria Bruno, an investment analyst at the Vanguard Investment Strategy Group, says, "Rebalance your portfolio if you find your asset allocation has drifted by more than 5 percent." (Generally, it should be 60 percent stocks and 40 percent bonds, with a higher mix of equities the further you are from retirement.) With rates uncertain, "shorten the duration of the 40 percent bond portion," says Sam Stovall, chief equity strategist of S&P Capital IQ.
5. Make retirement account contributions as early in the new year as possible. Vanguard's Bruno says to do this "as early as possible in the year so you can start taking advantage of tax-advantaged growth." You can put up to $5,500, and $1,000 more if you are 50-plus as a "catch-up" contribution. (The deadline for the 2013 tax year is April 15.)
6. Try a seasonal approach. S&P Capital IQ's Stovall says using seasonal patterns can boost investing gains. The November to April period is stronger than May through October. "It doesn't mean 'go away in May,' as some people say," Stovall explains. The stock strategy: Be more aggressive in winter and spring with consumer discretionaries, industrials and materials. Get defensive in summer and fall with pharmaceuticals and consumer staples. Over the long term, the strategy has produced double the returns of the Standard & Poor's 500 index (6.7 percent vs. 13 percent since 1945).
7. Consider the global economy when you diversify. "By not investing globally, you're missing out on an important diversification opportunity," Vanguard's Bruno says. Samson Capital's Lewis says it's especially important at a time when U.S. budget woes threaten a debt downgrade. Try to "diversify into strong balance-sheet nations with good governance," he says.
8. Look for good global brands that may be undervalued. Markets in Europe and Japan leaped over the past year amid signs of economic recovery. To find value, says Bill Mann, chief investment officer of Motley Fool Asset Management, seek "powerful global brands that have very little exposure to the local economy." He cited shoe and apparel maker Adidas as relatively cheap based on earnings estimates. S&P Capital Reports data shows Adidas's earning growth is projected to be twice that of similarly priced Nike next year.
9. Take some profits. Following this year's boom, some of those big stock gains might be getting stretched. "It's not a popular view, but I think it might be a good time to raise some cash. Lots of highly speculative stocks have been getting bid up," Mann says. "Leave some powder dry." Also, remember that you can recognize a tax loss on a stock that is sagging and reinvest in it after 30 days "if you think you still want it for the long term," says Gary DuBoff, managing director of CBIZ MHM LLC.
10. Don't let inflation fears guide your entire strategy. People have been waiting for a long time for inflation to heat up, and it hasn't yet. Wealth advisor Sumnicht says he thinks a flare-up may come this year and advises investors to hold "at least a bit of gold, even if it's just 2 percent of your holdings to keep your foot in the door" via exchange-traded funds like the SPDR Gold Trust ETF.
11. Beat-up emerging markets are worth watching. Emerging markets have been beaten up while the rest of the developed world has experienced gains. Jason White, T. Rowe Price equity portfolio specialist, says emerging markets underperformed major markets by 25 percent over the past year. T. Rowe's view, according to a company report, is that emerging markets' "long-term growth story remains intact and that valuations are at their most attractive levels in years." A diversified fund is a way to get into this hard-to-invest-in sector, and only in limited quantity.
12. Look for success stories that have wheels. Two big winners this year have been the airline and auto industries. But have they risen too much? No, says S&P Capital IQ. Because airlines slashed costs during the severe recession, even small traffic gains go right to the bottom line. The sector is "poised to benefit from increased air travel demand, both business and leisure," according to S&P Capital IQ. It cited Fidelity Select Air Transport Portfolio as its favorite airline/aerospace fund. The auto outlook is similar: Cost cuts and improved sales are boosting results. Zacks Investment Research still rates autos as one of its top sub-sectors, and sees it boosting fourth-quarter profit 25 percent. But Ford and GM still trade at below-market prices-to-earnings levels.
13. Buy large-cap stocks for their double value. "Tweak your allocation more to the large-cap side for next year," Sumnicht says. These companies have the potential to boost dividends if inflation grows and to lift foreign earnings if the dollar weakens. He likes large-cap funds SPDR Dividend Yield ETF and First Trust Value Line Dividend Portfolio Trust.
14. View volatility as an opportunity. There is one virtual certainty for 2014. "There will be volatility," Sumnicht says. "With the political situation of the debt ceiling coming back again. It's not likely to lead to a default. I'd use it as an opportunity to buy equities."
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