As 2018 comes to a close, most of you will be more than happy to wipe away the last three months of stock market woes. With interest rates sure to climb up more in 2019, uncertainty with the China trade wars, and a looming national debt, it has many investors wondering where the best place is to put your money in 2019. While nobody can predict the future, it's important to review how you are investing your money relative to your goals, objectives, time frames, risk tolerances, tax brackets, etc.
In 2018, we saw far too many people who were older and had too much money in the stock market. It's important to remember to 'act your age' and in general you should look at the rule of 100. If you are 60 years old, roughly 60 percent of your portfolio should be in safer more secure type investments and 40 percent in equity or investments that carry more risk. If you are 40, the opposite should be true. Again, the amount of risk you need to take may be relative to your goals, when you need the money, and your appetite for risk. Everyone is ready to be risky until they actually lose money. Here are some ideas for how to invest in 2019, but always seek a meeting with your financial advisor before making any moves.
Stick It To The Tax Man
What is one thing we can all be certain of besides death? Taxes! The IRS is letting all of us get out our water gun and soak the IRS a little bit more in 2019.
The contribution limits for 401(k) plans, 403(b) plans and most other employer-sponsored retirement plans will be rising from $18,500 to $19,000. If you're 50 or older (born in 1969), you can continue to make an additional $6,000 in "catch up" contributions, bringing the total to $25,000. These numbers include only salary deferral; any employer matching or profit sharing is icing on the cake.
If you own a business, the news gets even juicer. If you set up a solo 401(k), you can between employee and employer contributions put away as much as $56,000 in 2019. All business owners should be taking a close look at the type of retirement plan they have set up. Should you be using a SEP IRA, SIMPLE IRA, Solo 401k, Pension Plan, or some other type of construct.
Consider Adding A Slice Of Utilities
Utilities have historically been viewed as a safe haven, providing ballast for a diversified portfolio when markets turn downward, and for good reason. They are primarily domestic, U.S.-based companies, and are less economically sensitive, as most consumers pay their utility bills during both strong markets and recessions. As of October 31, the utilities sector had an average yield of 4%—the highest of any S&P 500 sector—and was expected to deliver 5% to 6% earnings growth. Utilities have historically distinguished themselves as the best performers in equity down markets, dramatically outperforming the broader index during six volatile years since 2000 (See chart below). Utilities also overcame losses from earlier in 2018 to deliver returns on par with the broader market as of the same time period. From my vantage point, if the new normal for the equity markets is a period of lower returns, these fundamentals for utilities may make them an attractive investment option as part of a broader portfolio. They tend to better during volatile times. (source fidelity.com)
What are the beaten down sectors?
While everyone has been closely looking at the U.S. stock markets, one of the worst performing sectors has been emerging markets down in the close to 20% range year to date.
Consider the two major measures of valuation that show this great disparity: dividend yield and price-to-earnings ratio (p/e ratio). U.S. stocks are trading at 18 times forward earnings. This means an investor in domestic stocks is paying 18 times for every dollar in earnings. A p/e ratio is an assessment of the value of stocks the same way a price-to-square-foot ratio is an assessment of the value in real estate. The long-term average p/e ratio is approximately 15 for U.S. stocks; based on this measure, they're roughly 20% overvalued. Meanwhile, emerging market stocks are trading at roughly 11 times forward earnings, while their historical average is typically higher than even that of U.S. stocks, around 16 times (emerging market stocks typically trade at a higher multiple because they have a higher growth rate). This implies that emerging markets stocks are perhaps 30% undervalued. This means that to buy U.S. stocks now and eschew emerging markets stocks is like overpaying for an apartment whose fair value is $1,500/square foot by ponying up $1,800/ft while ignoring that better one that usually goes for $1,600/ft which is now selling at the fire sale price of $1,100/ft. It's not rational, but that's what people do when they see a trend: they continue to follow it. They buy what goes up because it already went up instead of seeing where the current value resides. For a while this works. But as every bust from the dotcoms to Bitcoin has shown, it only works until it stops working.
If you're not convinced by the p/e ratio difference, then you only have to look at dividend yields to see the dizzying disparity there. U.S. stocks are paying an estimated forward dividend yield of 1.84%. Meanwhile, emerging markets are paying 3.35%, fully 82% higher. Due to their faster growth rates, emerging markets should have a lower dividend yield—but they currently have one nearly double that of domestic stocks. Not since the dotcoms traded at a ridiculous 90 times earnings in 1999 and forsaken industrial stocks traded at a third of that have, I seen such a gap. And we all know how that story ended. (source; forbes.com)
Value May Be More Attractive Than Growth
We've all seen the meteoric rise of growth stocks such as Amazon, Facebook, Netflix, and other that are on the tip of our tongue. These kinds of companies are considered growth stocks. One consideration for 2019 is to look at the other side of the equation or value stocks as an overweight in your portfolio.
The basic concept behind value investing is so simple that you might already do it on a regular basis. The idea is that if you know the true value of something, you can save a lot of money if you only buy it on sale.
Most folks would agree that whether you buy a new TV when it's on sale or when it's at full price, you're getting the same TV with the same screen size and the same picture quality. (The obvious assumption that we have to make is that the value of the TV will not depreciate with time as new technology becomes available.) Stocks are the same way: the company's stock price can change even when the company's intrinsic value is the same. Stocks, like TVs, go through periods of higher and lower demand. These fluctuations change prices, but they don't change what you're getting.
Many savvy shoppers would argue that it makes no sense to pay full price for a TV since TVs go on sale several times a year. Stocks work the same way. The only difference is that, unlike TVs, stocks will not be on sale at predictable times of year such as Black Friday, and their sale prices won't be advertised. If they were, stocks on sale would be less of a bargain because more people would know about the sale and drive the price up. If you're willing to do the detective work to find these secret sales, you can get stocks at bargain prices that other investors will be oblivious to.
Value investors possess many characteristics of contrarians- they don't follow the herd. Not only do they reject the efficient-market hypothesis, but when everyone else is buying, they're often selling or standing back. When everyone else is selling, they're buying or holding. Value investors don't buy the most popular stocks of the day (because they're typically overpriced), but they are willing to invest in companies that aren't household names if the financials check out. They also take a second look at stocks that are household names when those stocks' prices have plummeted. Value investors believe companies that offer consumers valuable products and services can recover from setbacks if their fundamentals remain strong.
Value investors only care about a stock's intrinsic value. They think about buying a stock for what it actually is: a percentage of ownership in a company. They want to own companies that they know have sound principles and sound financials, regardless of what everyone else is saying or doing. Source: investopedia
Rates Are Going Up - Pay Down Debt
Remember, we saw the Fed raise rates another .25 basis points and we are likely to see at least two more raises in 2019. This means if you are thinking about investing in bonds, you need to consider closely what type of bonds you are going go buy and how long you plan to hold the bonds. We should see better savings rates and as we close 2019 some of the online banks are 2% or north in what they are paying.
The big news is if you carry an adjustable rate mortgage, a home equity line of credit, credit card debt, or variable rate student debt, you need to really consider accelerating your payments of this outstanding debt. Credit Card financing charges will likely be higher than 15% on most of your credit cards, and some of them will be above 20%. If you did that backyard remodel or new bedroom makeover with a home equity line of credit, some of them will top north of 7% here in 2019. One of the guaranteed returns you have is paying off high interest rate debt.
If you want to know what to do with your portfolio, go to www.oxygenfinancial.net and set up a complimentary consultation today.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
CEO and Founder oXYGen Financial, Inc.
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