With slow growth ahead, now is the time for considering long-term opportunities and staying focused on your goals.
If you feel as though U.S. and global forces have combined to create special challenges for investors, you’re not alone, says Alan McKnight, Chief Investment Officer for Regions Asset Management in Birmingham, Alabama. From plunging oil prices to stock market swings to struggling emerging markets, investors have seen just about everything this year, except what they might want to see most: clear signs of stability and growth.
In addition to those economic considerations, daily news reports about everything from wars in the Middle East to one of the most polarizing U.S. presidential campaigns in modern history only adds to the general sense of disruption. While some issues, such as the election, are sure to be resolved soon, investors may have to be ready for an extended period of slower-than-desired growth, McKnight says. “Combined stock and bond returns over the next seven to 10 years may be lower than their historical averages.”
Assessing the landscape
For investors, a first step is to consider where the investment opportunities lie in this challenging environment, and where the danger zones may be, McKnight says. To that end, he looks at global markets and economic factors, with a nod to Hollywood, as “the good, the bad and the ugly.”
The good. “The U.S. economy is still growing,” McKnight says. “It’s growing less than many people would hope. But we’re not on the cusp of recession in the United States, inflation is firmly in check and unemployment has come down significantly. When you add those up, that’s a pretty healthy situation. It’s not great, but it’s good.”
The bad. The caveat on the U.S. economy is the degree to which the long, slow recovery from the Great Recession still depends on government policies such as monetary easing and low interest rates. “At some point, the economy has got to stand on its own,” McKnight says.
The ugly. In an effort to boost anemic economies, Europe and Japan have both experimented with negative interest rates. “Buying a bond with a negative rate means you’re not generating return, you’re actually paying people to hold your money.” Another “ugly” element to the current global picture is commodities, led by low and volatile oil prices, he adds.
Strategies for the road ahead
With such conditions in mind, now may be a time to speak with your advisor about ways to strengthen and balance your investment portfolio for the time ahead—always with a view to your long-term objectives, McKnight says.
Stocks. The relative strength and resilience of the American economy compared with the rest of the world suggests a greater focus on U.S. equities for particularly large, well-diversified companies, McKnight says. “They have the breadth and depth globally to generate earnings growth in spite of a weaker environment, versus smaller companies.” Larger companies may also be a reliable source of dividend income.
As for global stocks, one area for caution is emerging markets, McKnight adds. Countries such as China and India, for years the world’s engines of economic growth, have struggled recently. “They’ve got a lot to work through,” he says. Over the long term, emerging markets will continue to grow, and their large populations of consumers and entrepreneurs will create opportunities, he says. But just as the U.S. industrial revolution occurred in fits and starts, China and India are enduring a difficult period. “You can’t just say China is going to experience 8% growth every year,” McKnight says. “That’s not possible.”
Bonds. When it comes to income, of course, investors usually turn to bonds, whose fixed returns also help lower a portfolio’ s overall risk. Amid continuing low interest rates, especially for U.S. Treasuries, bond yield can be frustratingly hard to come by. Investors might look alternatively to investment grade corporate bonds, McKnight suggests. “Corporate balance sheets are generally in good shape right now,” he says, so high-quality bonds could offer enhanced yield without taking on undue risk.
Diversified investment strategies. Now may also be a time for investors to consider looking beyond traditional stocks and bonds to augment what may be sluggish returns for the next several years. These strategies might include such alternative investments as managed futures, hedge funds or real estate.
Because these opportunities are so diverse, it’s important to consider with your advisor which ones might best suit the needs of your portfolio, McKnight adds. “The key benefit is that they are non-correlated with your other investments, which means they don’t rely on stocks or bonds doing well in order to generate returns.” A hedge fund or managed futures contract, for example, might be structured specifically to perform well at a time when stocks are suffering—thus offering protection against volatile markets.
Keeping your balance
No matter how well you’ve prepared your portfolio to meet your long-term goals, one area that investors may be inclined to overlook is the need to periodically rebalance their investments, especially during times of volatility. As some assets or asset classes perform well and others struggle, the original balance you put in place may be skewed. In simplest terms, if you’ve decided on a ratio of 60% stocks and 40% bonds, and stocks surge, the proportion might shift to, say, 70-30—a higher risk. Rather than rebalance at a preset time each year, as some models call for, McKnight suggests an approach dictated not by the calendar but by “where the markets and your portfolio are.”
Keeping it all in context
Investors overly concerned with daily volatility may be tempted to drop out of the markets or, on the other hand, to buy and sell rapidly in an effort to beat the markets as they move up and down—both strategies with potential serious drawbacks. Pulling out means missing long-term growth opportunities and paying a premium to get back in later, while efforts to “time” the market usually fail, McKnight notes.
At such times, it’s all the more important to focus on investment strategies that support your long-term goals, he adds, and to try to put some distance between yourself and the 24/7 news cycle. While today’s developments may seem uniquely challenging, “if you go back over the last 100 years, there have always been crises,” says McKnight. “A systematic approach, sticking to a process and a philosophy, will get you through volatile times, which are inevitable.”
