With the arrival of the new year, we receive an avalanche of global, national and local economic and market predictions.
In considering how to U.S.e these predictions, you will first need to break them down to U.S.able pieces and then decide how to apply them to your portfolio. From my review, it seems the majority of economists expect next year to be very similar to 2012. However, the probability of a U.S. or global slowdown is relatively high and the chances for faster growth are small. Here are some ideas to consider when applying these predictions to your investments.
The base scenario has the U.S. economy and markets growing slowly, no more than 3 percent in 2013. Larger, developed countries such as Europe and Japan will continue to struggle and have less growth than the U.S.. China and other emerging markets will grow slightly faster than in 2012. Inflation in the U.S. stays below the long term average of 3.5 percent and interest rates remain low. Investment markets will be volatile becaU.S.e of tight interconnections and political uncertainty in many countries and regions.
As this scenario unfolds, you would want to be invested in companies that have strong financials such as balance sheets and cash flows and cU.S.tomers in growing regions such as the U.S., Asia and emerging markets. Large U.S. companies having these characteristics have done well recently. Companies outside the U.S. have not appreciated as much, have more growth potential and may be a better buy. Smaller companies and consumer discretionary products have lower risk adjU.S.ted potential. U.S. Treasury debt holds little potential to gain and much to lose when rates increase. International, U.S. municipal and company bonds may see moderate gains in value as their credit quality improves.
What if negative events slow economic growth? This includes events such as not resolving the "fiscal cliff," hitting the debt ceiling or continued Mideast instability. BecaU.S.e you cannot predict the future, it would be wise to have some investments that will perform better in a more difficult environment. In this scenario, investors will move towards safer investments and those tied to real assets. In addition to companies with
strong finances, U.S. Treasury bonds and precioU.S. metals are safer investments - at least in the short run.
In the unlikely case that growth accelerates, technology, other growth companies, consumer goods and indU.S.trial materials would lead the pack. For fixed income investments, it would time to move out of U.S. Treasury and high grade bonds, and move into lower quality and international bonds that will see improved credit quality.
It is wise to determine what you believe is the most likely scenario over the next year and position the majority of your investments to benefit from the expected conditions. To cover yourself, identify alternate better and worse scenarios and the probability of them occurring. This will allow you to assign the appropriate number of investments based on the probability, intensity and direction of the scenarios. There are many free economic reviews available and resources to evaluate economic trends such as Economic Investor.com. Considering these allocation techniques can help reduce your potential for losses while taking advantage of the expected conditions.
Tom Roberts, owner of A New Approach Financial Planning in Lakewood Ranch and Sarasota, can be reached at 941-927-9590 or Tom@ANewApproachFP.com.