The beginning of a year is a good time to evaluate your investment portfolio and think about how to position it going forward. That’s the purpose of The BlackRock List, which we have just updated for 2015.
First, a quick look back before we make decisions about the future. After the global financial crisis, the Federal Reserve (Fed) and other central banks have kept interest rates extraordinarily low to try to revive their economies. Six years later, the economies in the United States, United Kingdom and select emerging markets are getting stronger, but other regions are still struggling. As economies take different paths, so do their central banks. The Fed sets a course for higher interest rates, and we expect the U.S. economy to continue to lead the pack this year. However, the European Central Bank and Bank of Japan are doing the opposite.
Central bank and economic divergence have been the underlying themes in my recent writings, and these are having, and will continue to have, significant influence on financial market direction. A stronger U.S. dollar is a result of this divergence, and this trend is likely to continue and exert more downward pressure on both commodities and inflation. Inflation remains low in the United States, but elsewhere in the world, particularly in Europe, deflation is the greater concern.
Uncertainties abound, we offer The BlackRock List of five things to do to help you get your bearings and build your portfolio for 2015.
- Stick with Stocks, But Be Choosy
The economic and monetary environment continues to be supportive of equities, even as we expect volatility to return to more normal levels. For long-term growth, we prefer stocks over bonds, but we recommend comparison shopping across markets and sectors since corrections may be more severe in some areas than others. In the United States, we like cyclical stocks that could benefit from ongoing economic growth, but wary of defensive stocks that are historically more sensitive to changes in interest rates and have become quite expensive.
- “Stock Up” Outside the U.S., Too.
Despite increased risk associated with international investing, most of the stock market bargains are found overseas these days. You don’t want to miss out because of a home bias toward U.S. stocks or small international exposure. Where should you look? We see value in Japanese equities and emerging markets in Asia, and we are also keeping an eye out for opportunities in Europe, particularly cyclical names, where the looser monetary policy could help stocks.
- Watch Your Step in Bonds.
Finding a steady income stream continues to be a challenge as yields stay low. With a Fed rate hike approaching this year, shorter-term bonds are likely to bear the brunt, though longer-term bonds will also be affected. Consider municipal bond, as they offer some value relative to taxable bonds, and high yield debt, where the recent sell-off has created some opportunities.
- Resist the Urge to Exit.
We expect to see higher volatility this year, and this might scare some investors to cash out. However, avoiding the markets can cost you over time. It’s important to hold some cash, but when you factor in inflation and taxes, you are left with negative returns. What is more, many investors are already over-allocated to cash according to our research. Put your cash to work.
- Seek Growth in a Low-Growth World.
Many corners of the world are growing slowly, leaving quite a few traditional assets relatively pricey. To this end, we suggest casting a wider net: international stocks, emerging market bonds or frontier markets, even alternative investments. Diversification doesn’t guarantee profits or prevent loss, but in a world that offers few steals, mixing it up may be one of the best things you can do. For younger investors, use volatility to your advantage and look for bargains during any sell-off.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock.
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