David Yoe Williams, a commodities and gold expert and a panelist on TheStreet’s latest Trading Strategies says politics and cryptocurrencies will likely dominate the market in August.
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Investing in the stock market can be a challenge, even when the Dow Jones Industrial Average and other barometers keep hitting new highs.
Here are a few of the many problems to consider:
Owning poorly diversified portfolios
Most investors have at least a general notion of what diversification is all about. The idea is to add more and different types of assets to a portfolio, in the hopes of boosting returns or limiting risks.
“Someone with one stock should attempt to own 10. Someone with just stocks should consider owning bonds,” said MRA Associates of Phoenix in a recent commentary. “Similarly, someone with just stocks and bonds should consider owning other assets.”
One reason is to make sure you participate in uptrends, like the stock market advance of the past eight years. Broadly diversifed portfolios will do that, but there’s no such assurance with just a handful of stocks. Another aspect is to cushion your portfolio against declines. You don’t want all your assets stumbling at the same time, to the same degree. Assets that don’t move in lockstep with the market provide some protection.
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Stock investors can find some diversification benefits from bonds, cash, commodities and even specialized equity holdings such as REITs or real-estate investment trusts. Some more esoteric investments listed by MRA Associates as having less of a stock-market correlation (and more diversification benefits) include those tied to farmland, reinsurance and life settlements, though these areas aren’t so accessible as bonds, cash or REITs.
It’s wise to assess the correlations of your various holdings from time to time, making sure your portfolio is reasonably diverse and balanced. When the next bearish phase arrives for the stock market, you’ll be glad you did.
Harboring home-country bias
Diversification includes owning stocks — and even bonds or other assets — from other nations. The U.S. market has been strong over the past eight years, and so has the dollar, but trends go in and out of favor. The next leg in the cycle could favor international investments. Foreign markets are doing much better so far this year.
Gregg Fisher of investment-advisory firm Gerstein Fisher suggests Americans increase their exposure to foreign stock markets, and not just because many of these markets have sprung to life and because price-earnings and other valuation measures are lower elsewhere. In addition, he argues that Americans tend to invest too little outside the U.S. because of home-country “bias” that makes them more receptive to owning American stocks. Such bias can mean missed opportunities elsewhere and less diversification.
Through mutual funds and exchanged-traded funds, it’s much easier now than decades ago to invest in foreign stocks, and at lower cost, without needing specialized knowledge or access. That makes international investing accessible to nearly anyone.
“We estimate that Americans have only 20 to 25 percent of their equity portfolios in foreign stocks, whereas at least 30 to 35 percent may be more appropriate,” Fisher wrote in a recent report. Foreign companies account for about three-quarters of global economic output and half of global stock-market capitalization or value. Over time, a globally diversified portfolio can be expected to beat one focused solely on the U.S., he added.
Bonding excessively with a stock
It’s natural to feel an attachment to certain stocks, but sometimes this can go too far. Rebecca Kennell, a certified financial planner with Commonwealth Financial Network in Phoenix, said she sees it occasionally with clients who inherit stocks from parents or other relatives.
It’s often wiser to sell the inherited stock and move the money into something else, but some people refuse to do so, out of respect or commitment to the deceased relative or friend. “This can be a misplacement of love,” Kennell said. “If you inherit stock from a relative, try to find something else to hang onto, such as a watch or wedding ring.”
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Investors also can become emotionally attached to specific stocks for other reasons, especially if the business is the place where a person has worked. Companies offering 401(k) plans often will put their matching funds into their own stock, potentially making for some unbalanced retirement accounts.
One danger to falling in love with a stock is that the position could come to represent an outsized portion of a person’s portfolio, perhaps half or more, Kennell said. In such cases, it’s wise to transfer some of the money into mutual funds or other diversified assets.
Avoiding stocks altogether
The stock market has more than recovered from the financial crisis and recession of several years ago. Stock ownership has not.
In a Gallup poll this year, only 54 percent of Americans said they have money invested in the stock market, up a bit from last year but down from 65 percent a decade ago. Less-affluent people are more likely to have cashed out and stayed out — assuming they had any investments in the first place.
This trend has widened the nation’s rich-poor divide, as affluent households have disproportionately reaped the rewards from the market’s surge since early 2009.
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Plenty of people might have needed to cash out of their stocks out of necessity, requiring the money to make ends meet during the recession and slow economic recovery that followed. But fear, lack of financial confidence and other behavioral factors play a role, too.
“The gains in stock values in recent years seem to have done little to persuade people who may have divested themselves of stocks to get back in the market,” according to a Gallup statement. “It appears the financial crisis and recession may have fundamentally changed some Americans’ views of stocks as an investment.”
Reach Wiles at email@example.com or 602-444-8616.
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