Monday, December 16, 2013

Managing your retirement portfolio in 2014 and beyond. A few tips.

"I can't stress enough how important it is for the average investor to come up with an investment road map for themselves and not allow themselves to get swung by the hottest topic of the day and the chase return." - Mark Willoughby, chief investment officer, Modera Wealth Management, Boston.

"The only function of economic forecasting is to make astrology look respectable." - John Kenneth Galbraith, U.S. economist and author. (1908-2006)

By Julia Anderson
What should those of us who manage our own retirement investments expect in 2014? The folks at Fidelity Investments where I manage my accounts hosted a recent seminar on that topic for clients in my area. Here's a summary of what we heard.
Expect to see continued moderate economic growth in the U.S. next year despite a likely change in the Federal Reserve's bond-buying program. Generally, the Fed's easy money monetary policy will continue into 2015 since the U.S is still stuck in a slow recovery from recession. That likely means that the S&P 500 and the Dow Jones Industrial Average will advance at a steady, if slower pace than we experienced in 2013. Fidelity presenter, John Taylor, outlined the longer-term positives for U.S. markets:
- American household assets are still below prerecession levels but are recovering as home values have increased and retirement savings investments have gained ground.
- Inflation remains tame, which gives the Fed flexibility to hold down interest rates. "Fed action is not imminent," Taylor said.
- Unemployment rates continue to drop but the job market still is not producing enough new jobs to get us out of the slow-growth economy. The near-term outlook is positive but the longer term economic view is less clear.
- The U.S. energy boom is adding weight to the economic recovery by lowering energy costs and adding jobs.
- Personal income tax, property and sales tax-collections are going up as job growth continues, consumers spend more and housing expands. More tax revenue means that governments -- state, local and federal -- will stop cutting jobs and use the increased tax revenue to contribute to economic growth.
Where are we in the recovery?
Taylor said Fidelity sees us as "mid-way" through a recovery cycle with manufacturing job growth now kicking in, a housing industry expansion under way and improved consumer confidence.
However, the recovery is still fragile and the Fed wants to keep interest rates low so people will continue to buy houses. The good news for the industry is that more households are being formed in the U.S. than there are houses being built to accommodate the growth. People just need confidence about their jobs and the economy to feel good about buying a house.  Analysts at Forbes magazine say we are 67 percent back to a normal if you look at residential construction, existing home sales and home loan foreclosure rates, click here.
Has the S&P gotten ahead of itself with the big (25 percent) run up in average stock values in 2013? (CNNMoney, click here, for a few opinions.
According to Fidelity, the answer is probably yes but if earnings keep improving at publicly held corporations price-to-earnings ratios should stay in line and stock prices could continue to increase.
The average PE ratio for the S&P for the past 50 years is 15.1. Today (November 2013) we are at 16.5, not much higher than the average. Analysts see the S&P as "fairly" valued right now, not over priced.
The good news, said Taylor, is that companies are earning more money, which in turns justifies a higher stock price and growing dividend payouts.
What if the Fed allows interest rates to increase?
Research of 16 interest rate "tightening" cycles since 1922 shows that U.S. stock markets generally did well one to two years after the increases. Fifty percent of the time markets moved higher by 0.25 to 2 percent in the following couple of years.
So where should my investment money go in the later stages of an economic recovery?
A lovely Fidelity chart makes it pretty clear that these sectors typically do well: materials manufacturing and industries; consumer staples, health care, energy, telecom and utilities.
Two areas that don't do so well: consumer discretionary spending (retail) and technology.
Should we be dumping bonds because when rates go up, bond values decline?
Not necessarily, said Taylor. It depends on what kind of bonds you own.
Bonds serve a purpose in a diversified portfolio by providing steady income and price stability. Fidelity recommends owning short-term bonds in mutual funds where managers can sell off lower-paying bonds and buy higher-rate bonds as the Fed allows interest rates to rise.
What about emerging markets?
The outlook for emerging markets (Brazil, Indonesia, Turkey, South Africa etc.) is mixed with the world's developed economies (U.S. and Europe) looking more positive than those in emerging markets. Latin America continues to disappoint, said the Fidelity analysts. Global manufacturing is beginning to pick up led by developed markets.
So what should we do, now?
- Make sure your bond fund has the flexibility to adjust to rising interest rates. Keep bond investments in short-term categories.
- Look over your stock portfolio now that we are mid-way through a economic recovery cycle. What does better at this stage: Manufacturing, consumer staples, health care, energy for example. Make your adjustments.
- Don't expect markets to match 2013's performance. Slow, but steady.
- Based on past history, rising interest rates are not necessarily bad for stocks. More than 50 percent of the time, stocks move higher within one to two years of interest rate tightening.
- A global recovery will boost exports by U.S. companies.
What should we watch out for?

A stronger U.S. dollar means off-shore earnings will go lower. U.S. companies with huge off-shore business (McDonalds for instance or your European stock index fund) will see those earnings reduced by currency exchange-rate issues.
- In the short term we will have dealt with the federal deficit issue and economic instability, if the U.S. Senate passes the two-year federal budget deal this week.
Danger, danger!!! Long-term, the federal budget remains untenable because of rising entitlement expenditures related to Medicare, Social Security and government pensions. Congress must tackle budget deficit and debt reform. If the economy is to remain healthy, some heavy lifting by Congress has got to get done.
For more:
How to use the recovery cycle - click here.
Kiplinger's 2014 market outlook, click here.
U.S. Economic outlook, click here.
PIMCO's Global Outlook for the World Economy in 2014., click here.


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