Use the Guide
Browse the Guide
Portfolio Discussions
Dr. Kelly's Review
Use the Guide
Guide to Retirement
Discussions
Client Presentation
Headlines
Employment & the Fed
Navigating fiscal uncertainty
European Markets
U.S. Recovery
Headlines
Employment & the Fed
Navigating fiscal uncertainty
European Markets
U.S. Recovery
Featured Topics
Fixed Income
U.S. Equities
Income Opportunities
Global Growth
Looking for other topics? Visit the Library
Choose a Shortcut
Home Insights Library

 

Dr. Kelly's Commentary: Five Resolutions for 2014

Dr. Kelly's Monthly Commentary for December 2013.

DOCUMENT | DEC 12, 2013

Dr. David Kelly, CFA
Managing Director
Chief Global Strategist
J.P. Morgan Funds
Entering 2014, the global investment environment is as challenging as ever. After a super 2013 in returns, U.S. equities can no longer be considered inexpensive and yet still look attractive relative to the prospective returns on savings accounts and long-term bonds. Long-term bond yields are higher than a year ago but could still rise further as the Federal Reserve begins to reduce quantitative easing. While, many international stocks appear more attractive than their U.S. counterparts, both developed nations and emerging markets face challenges in returning to a path of steady growth in economic output and earnings.

However, amidst all this uncertainty, investors should remember that a great deal of their personal investment performance depends not on the behavior of markets but rather on the discipline with which they approach investing. With this in mind, here are five investment resolutions to consider for 2014:

Remember to rebalance: As part of any long-term plan, investors should have a strategic asset allocation, divvying up their portfolio into domestic stocks, international stocks, fixed income, alternatives, cash, etc. Sometimes, because one asset class appears particularly cheap or expensive, it makes sense to deviate from this allocation. However, very often the movement of markets themselves will alter this allocation. As a simple example, a portfolio that was composed of 50% stocks and 50% bonds at the start of 2012 (as represented by the S&P 500 and the Barclay’s Aggregate respectively) would now be 59% stocks and 41% bonds. While there is still a case for an overweight to stocks relative to a normal portfolio, a reasonable question to ask is whether this shift in asset allocation is justified by a different view of the world from two years ago and, if not, whether the portfolio should be rebalanced back to its original allocation provided this can be achieved in a tax efficient manner.

Income is more important than yield: In recent years, many investors have sought out high-yielding bonds and stocks as a way to get a portfolio to supply a stream of income without having to sell any securities. The problem with this strategy is that the Federal Reserve has done its best to push down yields across the bond market and investors searching for yield have pushed up the prices of high-yielding equity securities eating into their long-term prospective returns. Moreover, there is no law in finance or logic that says an investor cannot sell principal. A more logical approach for 2014 may be to contemplate an appropriate income distribution from a portfolio and potentially achieve it through a systematic withdrawal from the portfolio. If that means selling growth stocks as they go up, so be it. It actually may be more tax efficient than trying to achieve this income from taking the coupon payment on a high-yield bond. In any event, investors should separate the issues of portfolio construction, which should be done solely from the perspective of risk and expected return, from the issue of how to generate an income from that portfolio, which can be achieved just as easily from capital gains as from dividends and interest payments.

Avoid buying high and selling low: Historical data clearly show that mutual fund investors pile in at the top of a market rally and get out at the bottom of a market crash. This inevitably leaves them with lower returns than if they had simply decided to buy and hold. But how do you avoid doing this? Knowing the current level of the University of Michigan’s Index of Consumer Sentiment may help provide some guidance. Since 1970, this index has averaged a reading of 85.3, with six discernible peaks (averaging 99.9) and seven clear troughs (averaging 62.3). Over that period of time, if you had bought stocks at the peaks, the S&P 500 rose by just 1% over the following 12 months. On the other hand, if you had bought at the troughs, the S&P500 rose by an average of 22%. As this is being written, the index is at 82.5, and is thus close to its mean. However, the next time people are very depressed will probably be a time to buy and the next time they are exuberant will likely be a time to sell.

Review whether you have enough invested overseas: At the end of the third quarter, international equities accounted for 52% of the global stock market. However, U.S. investors, across households and institutions, had just 18% of their equity money in non-U.S. investments. There are some legitimate reasons for having an outsized proportion of your portfolio in domestic issues. In particular, assuming that most of your expenses are denominated in dollars, having most of your assets in U.S. dollars avoids currency risk. Still, given the cyclical opportunities in a recovering Europe and the long-term opportunities in emerging markets, investors seem to have too much of a “home bias”. 2014 should be a year in which to take a more global view.

Don’t irrationally hide long-term money in short-term investments: American investors have over $10 trillion sitting in “cash” accounts including savings accounts, money market mutual funds, time deposits and cash in Keogh and IRA accounts. Most of this money is not being used for day-to-day transactions but is being held as cash because cash is seen as being “safe” or because investors simply do not know what to do with it. This is almost certainly a mistake. Central banks, including the Federal Reserve, the European Central Bank and the Bank of Japan have all deliberately pushed the yield on cash accounts to close to zero in an attempt to stimulate economic growth but also to induce investors to take risks. Not surprisingly, balanced portfolios of stocks, bonds and alternatives routinely beat cash in terms of total return. While in any week there is no guarantee that balanced investing will beat cash, in the long-run it has done so with some consistency, particularly when cash yields are so low.

In summary, 2014 should be a year for thoughtful investing. It should be a year to consider rebalancing, to determine if you are invested for income rather than yield, to be confident you are investing based on logic rather than emotion and to think about more international investing. Most of all, it should be a year to verify that your long-term money is invested in long-term assets.

Any performance quoted is past performance and is not a guarantee of future results.

Diversification does not guarantee investment returns and does not eliminate risk of loss.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

The price of equity securities may rise or fall because of changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to "stock market risk," meaning that stock prices in general (or in particular, the prices of the types of securities in which a fund invests) may decline over short or extended periods of time.

International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations.

Fixed income is subject to interest rate risks. If rates increase, the value of fixed income investments generally declines.

JPMorgan Distribution Services, Inc. is a member of FINRA/SIPC.

J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co., and its affiliates worldwide. 

©  JPMorgan Chase & Co., December 2013

Topics: Navigating fiscal uncertainty