By Rob Weagley, Ph.D., CFP
Occasionally, we are expected to provide perspectives on what we see in our financial world. While this is a daunting task, I admit that I find this to be a much more cheery topic than reading about the massacre of students in a faraway land. Thus, the following is my take on where we are and what we might expect of the remainder of 2015.
- While investing in bonds was a good place for one to have money in 2014, returning around 6%, the current year is less likely to have a repeat performance. Rising interest rates are very possible in the current year and bonds, with their fixed coupon payments, will decrease in value when interest rates rise. Thus, bond investments should be of short duration from higher quality companies and countries. This is particularly true, given that the US is in mid-cycle, as one of the few countries entering a phase where interest rates are expected to increase.
- The US does look relatively strong, comparatively speaking, and has gained increasing attention from the world’s investors. On a negative, the devaluation in the euro and energy prices has left Europe in a more favorable position for exports and consumer demand leading many to predict a Euro-turnaround in mid-2015. Meanwhile, China has been easing interest rates while they try to head-off a slowdown in their economy. Overall, global expansion is expected in this environment, although that expansion will be uneven from region to region. The uneven nature of the current environment has increased exchange rate volatility adding to investor discomfort and their overreactions.
- With energy prices low, nascent economies have been able to afford more energy use, allowing some of the frontier economies a chance to become one of the next installments of emerging economies. Political pressures, coupled with radical acts, creates a world where single country investing is perilous and the need to be diversified across the borders of these countries paramount. Besides, diversification never goes out of style and emerging markets have languished for some time. While it is very difficult to call a price bottom, the reluctance of the market to invest in these countries makes it tempting to cautiously increase one’s exposure.
- In 2014, the S&P 500 returned a very respectable 13.7% return. So far, in 2015, it has returned 0.4% return which, if it continues, is slightly more than 1.6% for the year. Most believe that it will be a welcomed outcome, if US stock returns can average 5-6% per year for the next decade. This is particularly true given the returns of the past few years. Still, if bonds are weak, and inflation continues to remain at bay, these returns will provide positive real growth to patient investors.
- We’ve seen a decrease in the correlation between US stocks and stocks of other countries. This increases the importance of global diversification but it does not tell you to put all your money in overseas corporations. Historically, an equity portfolio of 30% international stocks and 70% US stocks has less volatility and higher returns than a portfolio of all US stocks. Thus, the recent strength of the US market might be cause for some to rebalance their portfolios to ensure that they continue to have adequate exposure to all parts of our world’s economy. Moreover, even though inflation is low to non-existent, one should not stop worrying about it. Assets with hard assets behind them, such as real estate, or company stock dividends with a history of increases, need to be a part of your plan.
I have little confidence in my predictions. If I did, I would predict more often and be able to give more money to those who need it. Suffice it to say that I have thought about the above and I pass those thoughts to you. Yes, I worry about the turmoil in our world and, frankly, I will never understand armed conflict over religion. Yet, I believe that we, as individuals, should never detour from the basic tenets of financial success; saving more money, diversifying our investments, and doing these for as long as we possibly can.