SPONSORED — With a new tax plan in place and interest rate hikes on the horizon, 2018 is bound to be an interesting year for the market. Here’s what you need to know about your portfolio.
Investors are optimistic (mostly)
There’s no doubt about it; now is a good time to be in the market.
“We opened the year with a bang — and that’s nothing to do with 2018, but a reaction to the president’s tax plan,” said Ken Peterson of Online Trading Academy. According to Merrill Lynch’s Global Fund Manager Survey, professional investors now believe the bull market will continue through 2019, placing this market alongside with the 1990 to 2000 market as the longest bull market in U.S. history.
The bond market, however, is on the minds of investors. Bonds have ridden a 35-year bull market. There are bond traders who have never experienced a bear market. How they react to changing conditions will weigh heavy on the rates of return for them and/or their clients. The Federal Reserve has raised interest rates three times in the past 18 months with promises to raise rates three more times this year. For bondholders, higher rates mean lower investment values. Baby boomers, currently holding bond portfolios, will be adversely affected. The good news is people nearing retirement may be able to reallocate portions of their portfolio into fixed income products. It could lead to a scenario like we had in the early 80s; good rates of return for fix income with very low risk.
There are no guarantees
Merrill Lynch’s survey also uncovered another concern: market volatility.
“As interest rates rise, at some point inflation must enter the calculations for investors,” Peterson said. “The survey shows investors concerns about inflation are the highest they have been since 1995.”
According to Peterson, this rally in equities has been good for most Americans, but Americans tend to be creatures of habit.
“Often assuming if the market is good this year it will be next year as well,” he said. With professional investors staying in equities until 2019 — then reallocating — it’s smart to consider doing the same.
Earnings will be affected
As interest rates rise, large investors are incentivized to move out of riskier investments and into safer ones.
“Thus, money comes out of equities and moves into fixed income,” Peterson explained. “As this happens, corporations usually pay higher dividends in order to compete with fixed incomes; this helps hold their stock prices high.”
Unfortunately, dividends come out of earnings. As companies must compete for investors, their earnings are redirected. Since earnings are the lifeblood of stocks, this means equity growth will inevitably slow.
Time is on your side
According to Peterson, it’s not time to get out of equities; it is time to start looking for the exit.
“Don’t get caught in lazy thinking,” he warned. “That means don’t keep your 401(k) allocated the way it is just because that is what you have been doing since 1995.”
Millenials, in particular, have several advantages — mainly time.
“You have time to make mistakes,” Peterson said. “You also hold the most diversified portfolios.”
GenXers, on the other hand, need to get educated.
“Get yourselves educated on blockchain,” Peterson advised. “If you’re behind on your retirement planning, you can make it up — and blockchain will have a profound impact on the economy in the next 10 years.”
That doesn’t mean investing all your money in bitcoin. Doing your due diligence is as important now as it was during the internet boom of the 90s. Most of the companies involved will fail.
“Pick the right ones. Pick the Amazons, not the pets.com.” Peterson said.
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