The S&P 500 is closing in on its all-time high—1,575 reached in October of 2007—but the question among stock market investors remains: where’s the index going next?
As the S&P 500 is recovering from the aftermath of the financial crisis, many opinions are being thrown around.
Take a look at the chart below that shows the trajectory of S&P 500 over the past 30 years.
Chart courtesy of www.StockCharts.com
The Bulls’ Argument
The bulls argue that the S&P 500 is going to head much higher. They are focused on economic growth and the performance by companies on key stock indices in the U.S. economy. To give you some idea, according to FactSet, in the fourth quarter of 2012, companies on the S&P 500 reported an earnings growth rate of 4.1%. (Source: FactSet, March 8, 2013.)
Looking at current economic conditions, things are much better than they were before. The unemployment rate has certainly declined since the dark years of the financial crisis in 2008. In February, the Bureau of Labor Statistics reported that there were 236,000 new jobs created in the U.S. economy—and the unemployment rate reached 7.7%. (Source: “Economic News Release: Employment Situation Summary,” Bureau of Labor Statistics web site, March 8, 2013.) The unemployment rate is 23% lower compared to the 10% seen in the midst of the crisis. The bulls argue that now that Americans have jobs, consumer spending will increase. As a result, companies will sell more and earn more, and the key stock indices will reflect the results.
The Bears’ Argument
The bears have data to show the S&P 500 is headed lower. While the … Read More
By Sasha Cekerevac for Daily Gains Letter | Jan 2, 2013
There are many rules that people have come up with when it comes to asset allocation that need to be revised. Several deal with preventing investor mistakes, while some are erroneously placing capital where it will tend to underperform the market over the next decade.
Asset allocation is an extremely important part of one’s portfolio. Investor mistakes in asset allocation will lead to severe underperformance to the market, or worse, a shortfall in expectations for retirement savings.
One of the asset allocation models that should be thrown out is keeping only a small portion of a portfolio in foreign investments. While America is still a large economy worldwide, there are many parts of the world that are growing extremely quickly. There will be many investor mistakes from people keeping too much weighting in asset allocation on domestic companies.
While investing in emerging markets can be difficult, there are certainly a growing number of exchange-traded funds (ETFs) that allow for portfolio diversification and a greater amount of diversity in one’s asset allocation model.
While many picture emerging markets as just poor citizens, nothing can be further from the truth. As nations get wealthier, there are a growing number of citizens moving up into the middle class, which means increased amounts of disposable income available for consumption. This is evident all over the world, including Asia, South America, and Africa.
One of the leading investor mistakes is waiting until a nation is fully developed before investing. Some of the best capital appreciation investments stem from being early, as a nation moves up in wealth.
Another asset allocation mistake is the distribution between … Read More
When it comes to the portfolio, investments, and retirement planning, the biggest dilemma faced by investors nowadays is about where they should park their money, and how much. Should they invest all their funds in bonds or completely in stocks? Or should they just buy short-term cash securities like Treasury bills? There are literally thousands of choices to go with—stocks, bonds, mutual funds, currencies, precious metals, and many more.
When an investor is unsure about where to park their money and how much to place in a certain investment type, asset allocation plays an important role. The main goal of an investor is usually to achieve higher returns with calculated risk and diversification—asset allocation provides a solution to this problem.
At the core, the concept of asset allocation is to spread the savings or investment capital across different asset classes, so if one underperforms, the other bears the load of its demise—call it diversifying a portfolio with different investment types.
Sadly, there is no magic formula that suggests how much to put in a certain type of security or what to buy, but there are guidelines that investors can follow to achieve the optimal returns.
There are two most important factors an investor must consider when it comes to asset allocation:
1. Risk Tolerance
It is true that with higher risk comes higher reward, but let’s be honest—it’s not a viable option for every investor. How about those who are planning for retirement; can they risk heavily as a person in their mid-20s? If you risk more, your portfolio will be volatile—meaning it will see wild swings in returns.
Before … Read More
You buy and sell stocks and have fixed income, but do you know what your overall asset allocation is along with the risk? Too much equity and you are vulnerable to market selling. Not enough equity and you will be left behind should the market rally.
In my view, a critical investment strategy is the concept of asset allocation, diversification, and the addition of small-cap stocks to maximize the expected return of your portfolio.
The concept of asset allocation should be a key part of any prudent investment strategy.
Asset allocation refers to the asset mix of your portfolio, which is divided into the three major asset classes—cash, fixed income, and equity. Too much equity and you are vulnerable to selling. Too much cash and you could miss out on a stock market rally.
As the macro- and micro-factors change, you should rebalance your asset mix and modify your investment strategy. Put options should be used as a hedge against weakness.
The more risk assumed, the higher the expected rate of return; albeit, this is not always the case. For instance, adding micro-cap and small-cap stocks as part of your investment strategy not only adds growth potential to your total portfolio return, but it also increases the risk.
The proportion of each asset class within your portfolio is dependent on your individual risk and investment strategy. Risk-adverse investors or those who are near retirement age may want a higher mix of fixed income/cash, steering clear of too much equity, which makes for a practical investment strategy. On the other hand, risk-tolerant investors or younger investors may want to take a … Read More