Jan 6 2014, 11:37am CST | by Forbes
The New Year has barely arrived, and yet 2014 is already shaping up to be an exciting one if you have any economic interest in the markets. As we begin to think about how to deal with 2014 from an investment perspective, think of these current concerns:
A new Federal Reserve Chairperson this year that has signaled a market friendly style; a stock market with very strong performance that is bound to raise concerns about future returns; and there’s also the never-ending debate about whether the U.S. economy is really getting better at a consistent clip.
We all know that it is absolutely impossible to predict what will happen this year to interest rates, stock prices and your portfolio. (Let’s have a show of hands for those of you that foresaw that the S&P 500 would close out at 32%.) But one thing we will find interesting, if not unprecedented: I think there will definitely be a significant change of sentiment as 2014 moves into full gear.
Investors that sat on the much-referenced “sidelines” with their cash last year woke up January 1 very disappointed that they did not participate in a great rally. As a result, I don’t think they will remain inactive for the bulk of this year.
So let’s take a look at how an optimist or a latecomer to the market might view the year’s investment opportunities.
Stocks: Sure, there are people that consider today’s market overvalued by P/E measures. But those comments tend to be generalizations about the popular indexes such as the S&P 500, not individual stocks. When I look at my portfolio of about 25 stocks, there are still several stocks that analysts’ estimate earnings growth of 20% or more for the coming year. I’d say that’s a pretty attractive prospect, especially if most of these stocks are trading at a forward P/E of around 20.
So you have to take the valuation hype on a case-by-case basis. That’s how you can make money in stocks this year: finding the stocks whose earnings growth rate is in line with its P/E multiple.
Two stocks I like that fall in this category are HSN and Las Vegas Sands.
HSN’s Home Shopping Network segment is the main contributor to the company’s revenue, and the company continues to improve operating margins as we enter 2014. Likewise, Las Vegas Sands’ gaming market, targeted at China so far, is exploring expansion possibilities in Japan. It looks promising because Japan may permit casinos as it plans to host the 2020 Olympics.
Bonds: Almost everybody these days is thinking that bonds are finished. I’ve been a writer of this column for over two years, and by now you should guess how I respond to the so-called “consensus thinking”—especially when it concerns market matters.
Just because interest rates are most likely to move higher than lower in the current environment, one should not simply mass exit the asset class—especially if everyone (including the proverbial “shoeshine kid”) is chanting that mantra. The fact that everybody is aware of bonds is unusual. Bonds are hardly ever discussed in the general media, since stocks are normally far more interesting for some reason. This is another reason to be careful about changing the fixed-income component of your portfolio in response to the majority opinion, because atypical crowd awareness can signal a behavioral malfunction in logic.
To ground yourself, there are several Web sites that have models showing how certain laddered bond portfolios will fare when rates move up. My firm has a simulator that allows one to stress test a portfolio based on a rising rate scenario, for example. In general all the quant models show that, given a slowly rising rate scenario, a laddered account should do just fine as long as you don’t cash out, and keep investing that coupon income. So let the new Fed Chairperson arrive with all the press fanfare about expectations—it shouldn’t really matter to a long-term investor that much!
Alternatives: Have you noticed the current spin on the underperforming hedge funds out there? It used to be that hedge funds were marketed as exclusive, best of breed managers that offered the potential for stunning returns, with a certain air of exclusivity. But most hedge funds have underperformed recently. How do those managers explain this? I guess most of us simply did not understand the managers’ objectives of targeting “low volatility.” I wasn’t aware of that until last year, and I’m not sure that many other investors were, either.
By corollary, does that also mean any hedge fund that has beaten the S&P 500 by a large margin has missed its investment objective? I think you get my point. Leave it to the experts to vet and recommend alternative strategies, because it’s a very fragmented market that deserves full-time scrutiny in order to be approved in your portfolio.
As we engage the first full trading days of 2014, I’m optimistic that those with a rational, disciplined investment plan will be quite satisfied in eleven months—regardless of what the Fed does along the way.
Source: Forbes Business
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