5 Portfolio Moves for the Rest of 2014

Although the first half of 2014 has brought some investment surprises, the market has mostly played out as predicted with stocks outperforming bonds and the global economic recovery staying on track.

Russ Koesterich, CFA, global chief investment strategist for BlackRock, wrote in a recent column that stocks will likely finish the year with returns in the mid to high single digits, interest rates will trend up slightly, and the economy will continue to improve modestly.

Given the current low market volatility, an unexpected event could cause a temporary correction, so the second half of the year could still bring surprises. BlackRock is also keeping an eye on US inflation, according to Koesterich.

However, for the foreseeable future, these 5 investing opportunities are worth considering:

5. Favor stocks with a caveat

Stocks aren’t cheap, but they are not in a bubble, according to Koesterich. In fact, given the low-inflation environment, the price of stocks is possibly reasonable, and, at least, he describes them as “not unreasonable.” In fact, BlackRock expects stock prices will move even higher this year, a sentiment shared by InvestmentU writer Marc Lichtenfeld.

The beginning of the year was rocky for the stock market, with the S&P 500 falling more than 4% at one point. However, it’s not impractical to believe the market has a long way to go still before this bull market is over. Lichtenfeld pointed to history to make his case. While many people have noted that this bull market has reached the same length as the average bull market in the past. However, Lichtenfeld revealed that bull markets have been getting longer since the end of World War II, lasting nearly 9 years. Given that information, the market could still rise more than 70% over the next 3 years.

While stocks are more attractive than cash and bonds, there are areas of the market that are expensive, Koesterich wrote. He recommended focusing on large- and mega-cap stocks, cyclical sectors and international equities, which offer good value and potential downside protection.

4. Have sufficient exposure to international equities

Stock market bargains will be found overseas today, so investors should be looking to increase their international exposure. American investors tend to prefer the comfort of home and invest more heavily in US stocks. According to Koesterich, investors should consider developed equities like those in Europe and Japan, as well as emerging markets.

In another column, Koesterich wrote that Japanese equity valuations are among the lowest in the developed world, and well below US stock valuations. European stock valuations are also well below the US. He also pointed out that European stocks could benefit from recent market-friendly actions by the European Central Bank.

Investors turning to emerging markets should do their due diligence. Remember the BRICs? All but one struggled in 2013. Plus, the beginning of 2014 hit emerging markets hard. Bloomberg recently ranked the top emerging markets to invest in based on 19 different indicators.

3. Choose your bonds wisely

Bond investors are walking a fine line. Interest rates are low right now, but when they rise (and they will) long bonds will fall the most, hurting those investors who were naïve enough to invest at the wrong time.

Some people are simply writing off bonds all together, but they remain an important source of income and play a vital role in investment portfolios. InvestmentU recommends moving to shorter term bonds, which will decline by less when interest rates go up. Koesterich and BlackRock suggest a flexible bond portfolio that can be adjusted on the fly.

“At the same time, we’re cautious of shorter-maturity bonds (those in the 2- to 5-year range), which could face greater upward movement in yields and resulting principal losses,” Koesterich wrote.

Fellow BlackRock advisor, Matthew Tucker, CFA, warns investors should be cautious of 2- to 5-year bonds because it will be at the short-end of the US Treasury curve, and he believes valuations are still distorted by Fed policy.

2. Keep munis in mind

The first half of the year was good to municipal bonds, but it is unlikely the same returns will be seen in the second half of the year. However, munis still offer relative value because of their tax-exempt status.

“While they may not be cheap per se, they continue to look attractive versus both Treasuries and corporate bonds,” Koesterich wrote.

Recently, Forbes recommended buying investment grade munis rather than the high-yield sector because if other investors panic and rush out of bond funds, then it won’t affect your portfolio value. Perhaps munis won’t make you rich, but they will maintain your wealth and stabilize your portfolio, according to the Forbes investor team.

1. Go beyond traditional stocks and bonds

Traditional asset classes are facing challenges: stocks are not cheap and bonds are not offering a compelling value. Alternative investment strategies can enhance your portfolio’s diversification and amplify growth potential.

Using alternative investments to diversify your portfolio allows you to spread risk, but won’t guarantee profits or prevent a loss. However, if each investment responds differently to market conditions, then it can increase your chances of avoiding a big loss and possibly enjoying a gain when things turn sour.

A Morgan Stanley Wealth Management Investor Pulse Poll found household with a million dollars or more in financial assets own or intend to purchase physical assets as alternative investments. The top alternative investment is real estate with 77% of respondents owning real estate and 35% owning Real Estate Investment Trusts. Other top alternative investments include collectibles (34%); precious metals (28%); private equity (27%); and real assets, like oil, gas, and mining (17%).