Investing in today’s markets is a complicated process that’s left many investors scratching their heads. While there are no absolutes in investing, local financial advisers agree that there are some investment vehicles that bear a hard look – and some to steer clear of amid current market conditions.
Emerging global markets and the fluctuating economic climate have made investment decisions more complex for investors in recent years, said Jeff Layman, chief investment officer with BKD Wealth Advisors. Layman has more than 20 years of experience in investment management.
“When I started, people typically had blue-chip U.S. stocks and bonds (as) the primary investment tools,” Layman said. “Portfolios today have 13 asset classes with a much broader solution set.”
Investment advisers face the challenging task of predicting which investment vehicles are best for helping clients achieve their financial goals.
“The trick is to know when we’re right and to keep being right -– and not being wrong in big chunks,” said Jeff Werner a financial adviser with Empire Bank investor services.
Emerging markets Emerging markets in growing countries such as China and India – as well as Asian countries – could be bright spots for investing.
“Mutual funds in emerging markets are growing much faster than those in the U.S.,” Werner said.
Layman noted that direct investment in China is difficult due to limits the country puts on foreign shares ownership. Still, because China is a huge consumer of raw materials, a current trend is investing in emerging markets such as Taiwan, South Korea and Australia, which supply China with those raw goods.
“Today, a typical portfolio has about 40 percent of its investments in stock or bond investments outside of the country,” Layman added. “There is much more of a global position.”
Chuck Kohout, partner/adviser with Pinnacle Family Advisors in Springfield, agrees that mutual funds are still a good way to diversify a portfolio.
“It can also be a way to create a bucket of cash,” he said.
Bond funds Because bond funds go in the opposite direction of interest rates, and interest rates are expected to rise, some advisers are steering clients away from bonds.
“Interest rates can’t go down a whole lot more,” Werner said. “The easy money in bonds has been made. I think if people are getting into them as a perceived safe haven, they will be disappointed in the next couple of years.”
Overall, Kohout said investors seem to still be leery of the stock market.
“They are still looking for safety, which has them steering more away from stocks and toward bonds and cash equivalents such as money market accounts,” he said. “Where we used to see 75 percent in equities, we are now moving toward 50 percent to 60 percent in equities.”
Stock options For those who still want to invest in the stock market, blue-chip stocks might be less volatile.
“Blue chips tend to represent the safety of a large company and are pretty popular when people are unsure,” Kohout said, noting that he predicts more people will begin investing in small-cap stocks as the market improves.
“Small caps represent small business, and that’s where the job recovery will be,” he said.
Layman, too, has seen an uptick in small-cap investing.
“Stocks have rebounded from the market lows in 2009 and that’s been led by small cap, which hit an all-time high earlier this month,” Layman said. According to the Russell 2000 Index, small-cap stock hit 865.29 points on April 29.
Though he noted that blue chip stocks are still at 13 percent below where they were in 2007 – now at 1357.16 points according to closing prices for the S&P 500 on May 10 – Layman said continued economic recovery does provide some opportunity in that sector.
Alternative investments One of the hottest investment trends, these advisers say, has been for investors to explore alternative vehicles.
“We’re getting a lot of questions about people taking money from their (individual retirement account) or 401(k) to invest in alternative investments such as real estate or private equity funds. We have been recommending they look into it, depending on the size of their portfolio,” Kohout said, noting investors generally need sizeable portfolios to make alternative investments. While there are bargains in residential real estate, when homes are purchased as an investment – perhaps as rental properties – investors need to realize there will be more work involved.
“People have to be aware, then, that they will have to manage it, and it’s more than a passive investment,” Kohout said.
Commercial real estate also has opportunities worth investigating, but Empire’s Werner said those might be better for investors with cash on hand, as tightened lending may make borrowing a challenge.
Go for the gold? With myriad TV commercials and headlines about the higher price of gold, some investors see precious metals as a safer investment, but that’s not necessarily so.
“People want to go into gold and silver, but gold doesn’t pay dividends,” Werner said. “Silver was dropping, and I don’t think we will continue to see gold go up.”
As of May 10, gold was at $1,515.90 an ounce, down from recent highs of $1,556.70 an ounce. Silver closed that same day at $38.48 an ounce, down from highs in the last two weeks of $48.58.
“People think it is a safe alternative to the stock market, but once people feel it is safe, they will stop putting money into gold and it will drive the prices down,” Kohout said, adding that his recommendation is that no more than 5 percent of an investment portfolio be put in precious metals.
Layman agrees. “If you look at the price spike, it isn’t supported by anything other than uncertainty in other markets,” he said. “I don’t see (precious metals as) a bright investment into the future.”
Investor attitudes Regardless of which investment vehicles are chosen, the tried-and-true approach built on diversification remains solid, Werner said.
“If an investor goes into emerging markets or anything else, they should keep at least 15 percent in other things,” Werner said.
Kohout noted, too, that advisers have been working to keep clients calm in an uncertain financial climate.
“We’ve just been focused on steering clients away from panic and away from not saving and into a full cash position,” he said. “We’ve been trying to advise them to look at their investments in the longer term of five to 15 years.”[[In-content Ad]]