As investors return from there 3 day weekend it appear as
though they have come back happy, buying up stocks in all sectors and driving
the U.S stock market to new highs. By now I’m sure you think you know what is
coming, you think I am going to give another factual analysis of some hot new
industry, I’m sorry to disappoint but today I am going to write about something
completely different. This week’s article will be about where to invest your
401K.
Although
indexes are hitting all-time highs today it has been a bumpy ride over the last
6 months. Last year you could not have gone wrong by simply placing your 401K
or savings into simple broad market funds, which would have gained over 25%
last year. But this year despite the headlines the Dow Jones and NASDAQ are up
barely 1%, which is a far cry from the gains made last year. So the question
now becomes where is the best place to invest your 401K?
Unless
you are a seasoned investor investing your retirement savings could be tricky,
considering you have no shortage of investment options. You could invest in
broad market funds and ETF’s, commodities, Currencies, Treasuries, Corporate or
Asset backed bonds, or you can invest in emerging markets. Ordinarily it is
suggested that you keep 80% of your retirement savings in equities, to provide
meaningful growth and the other 20% in bonds to provide stability. That is good
advice but it’s very broad, below is an analysis of which equity, bond and
emerging market funds might prove most attractive for those wishing to invest
there 401K’s.
Equities-
2013 was a great year for
equities and stocks in general, it was a year where the Dow and S&P both
rose over 30%, but as 2014 is proving, those kind of gains across the board are
highly unlikely to occur again anytime soon. In fact over the last year
equities have gotten expensive, and no longer trade at the bargain prices they
did a few years ago, meaning that returns from stocks will probably be muted
for the next few years. What should also be taken into consideration is the
possibility of a steep correction. A correction is defined as a drop of at
least 10% and theoretically should occur once a year, but there has been no
such drop in the last 2 ½ years which has led some investors to worry about the
future.
With market
conditions as they are I have been minimizing my exposure to stocks recently,
and I expect a correction of about 15% to occur soon. With that said which
equity funds should you reduce exposure to and what should you keep?
The
first funds I would reduce exposure to would be funds focused on small and
midcaps. Small cap stocks are companies with market caps of under $5 billion
and mid-caps are companies with market caps of under $15 billion. Generally
these stocks are more volatile than ordinary blue chips, which at times could
be good because in bull markets they usually outperform the rest of the market,
the bad news is in bear markets these stocks tend to suffer more. Funds focused
on small and mid-cap stocks will most likely get hit hard during the inevitable
correction, which is why I would recommend getting out of them. With that said
after the correction occurs these funds will be the best investment because
when the market bounces back small and mid-caps stocks will most likely
outperform anything else out there.
Small
and midcap funds are not the only equities investors should start reducing
exposure to; large caps will also not be spared during a correction. But
besides the possibility of a correction another reason to lessen exposure to
U.S Equities is that with stock prices getting a bit out of control returns
from them will be reduced to maybe 5-6%. Which although is a healthy gain, your
money could be invested in other areas where it will be more productive. One
such area is bonds.
Bonds-
While equities performed
remarkably last year, 2013 was also a horrible year for bonds as investors,
worried about the possibility of rising interest rates, pulled billions out of
bond funds. Hence for anyone who maintained a large portion of their 401K in
bonds suffered, this year things could be different or can they?
With interest
rates expected to rise sometime this year and with the Fed winding down its
bond buying program bonds might suffer in 2014 also. So bonds might not pick up
the slack in your portfolio left by your flattening stocks. With that said,
high quality corporate bonds should perform well, and I would stay away from
high yield junk bonds because these usually tend to mimic equities which are
due for a no so light correction.
If stocks
are set to perform well over the next few years and bonds not ready for a
comeback what is the best place to invest your 401K to achieve the greatest
returns? The answer is emerging markets.
Emerging Markets-
Yes I know emerging markets
have not been the greatest investments so far in 2014, especially with the
crisis that occurred in several of them in January and February. But in my
opinion several specific emerging and international markets present a good opportunity.
One of
these markets is Russia; yes I know Russia has recently been hammered
economically as the West imposed sanctions due to Russia’s involvement in
Ukraine including the annexation of the Ukrainian province of Crimea by Russia.
Russian stocks have not fared the crisis well, as Russia’s main index is down
heavily in 2014 and analysts predict that Russia’s economy will most likely see
any growth in 2014 due to current geopolitical crisis.
Yet in
Russia’s case the old saying of “The Best time to buy is when there is blood on
the street” rings true. There seems to be light at the end of tunnel, for
Russia anyway. Russian state owned Natural Gas giant Gazprom has recently
signed a $500 billion deal to sell natural gas to China. And many Russian
stocks amidst the selloff have become cheap and could be bought at bargain prices.
Besides
Russia several other emerging markets might prove attractive investments as
well, India for one. After the election of the pro-business conservative
government in India, India’s stock market has been enjoying a fantastic rally.
But I would not get in on that action just yet considering the new Prime Minster
has not yet proven himself and the new government has not instituted any
meaningful economic reform yet.
Whether
or not you decide to invest in emerging markets is up to you but with equities flat
and bonds uncertain the emerging markets along with cash might be looking like
the best alternatives to which you could allocate your 401K to. But there are
always other alternatives; there are always individual stocks that will flourish
even amongst the worst bear markets and I will continue bringing you up to
speed on which ones are the best investments.
IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
IF YOU HAVE IDEAS FOR THE NEW WEBSITE PLEASE COMMENT
ALSO COMMENT ABOUT WHAT YOU THINK OF THE BLOG AND ANY IMPROVEMENTS YOU WOULD LIKE TO SEE
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