Well, 2015 is upon us and let’s face it, no one knows what to expect in the upcoming year. 2014 was extremely good to equity investors. The DOW Jones and S&P 500 set all-time highs in recent weeks. The NASDAQ is rebounding as well although it is not near the record levels that occurred prior to the Dot.com bubble. For the previous year, there were very few bad investments when it came to US based business who are publicly traded. And yes, as I have discussed in previous blogs the small capitalized equities did not have a stellar year but that means that there are buying opportunities even in this mist of a remarkable bull market.
Will the major indices continue this pattern of stellar growth in 2015? As I am not able to predict the future, I am not one to say one way or another. Do I think the markets have room to grow further? Yes, I think that is possible but as in any bull market there will be periods of corrections and even a possible change to a bear market at any time. While it is true that the economy is better off than just about any point in the previous five years that does not mean that the markets will continue their upwards path. While I genuinely hope that is indeed the case I am concerned that the markets are possibly inflated to a degree depending on many factors such as the core business, its sector, and the general economic outlook for that particular equity in general.
So with that being said that I think the markets are especially attractive right now considering their five year track record of phenomenal growth there are some areas outside of the major indices that warrant a further look at the New Year starts. As I mentioned earlier small and medium sized companies that are publically traded had not seen the tremendous growth that the larger companies have in the last year. If you wanted to invest in the US markets and did not want to buy equities at high values consider looking at smaller well run businesses that are traded. Yes, it is true that these companies tend to carry more risk that larger ones but the returns historically have also been greater as well. With mutual funds and exchange traded funds there are countless choices and opportunities for an investor to get into this section of the markets while there has been limited growth over the past year. In reality over the last few years small and medium cap equities have been mostly stagnant. With that being considered, I believe that this provides an excellent investing opportunity for someone who wishes to invest in the US markets in some degree and not pay what can be extremely high prices.
A second opportunity that exists in equities that has been fairly left out of the bull market run is emerging markets. While this particular asset class of the markets carries more risk than even small and medium caps US businesses, it does also have the potential to grow and grow very fast. With the use of mutual funds or exchange traded funds, an investor can get an international exposure that is needed in a well-diversified portfolio at a time when the emerging markets are relatively priced low. I have a Vanguard ETF that is an emerging market fund that is even to where it was when I purchased it three years ago. Do emerging markets carry additional risk? Of course, they do, but they also carry the potential for additional rewards if they start to turn around. Now there are some additional concerns that may affect one’s decision to invest in emerging markets ranging from increasing interest rates to the strengthening of the US Dollar. Both of these could lead to a further pullback in the emerging market’s value so it may be a wise move to buy these in smaller blocks instead of pulling the trigger all at once. Dollar cost averaging is still a good method of investing, and this is a good asset class to practice that in today’s economic environment.
For the last five years, US issued bonds have not been an ideal investment, but I do see interest rates going up later in 2015 for some reason. It may be that the Federal Reserve has ceased Quantitative monetary policy or it may be due to the fact rates have been so very low since the end of the recession. If you are a bond investor, intermediate US issued bonds are not near as interest rate risky as a longer term bond so it is always possible to invest in that area. Corporate bonds have not been much better than US issued bonds due to high credit ratings, but there are some additional profits to be found in high-grade corporate bonds. If you want to invest in US corporate bonds, the higher rated “junk” issues offer decent returns but then again you are taking on additional risks with your principal. But I think you would be safe in this arena with proper due diligence and homework on the company prior to your purchase of a bond. And the foreign bond markets do hold some very attractive returns if you were to purchase a low cost mutual fund or exchange traded fund but you have to remember that different countries are experiencing different economic conditions from the US. Some countries are experiencing growth while others are facing or may be in a recession. If you go international, do your homework on the fund, you are considering and buy one that is well diversified in the region or even globally.
While 2014 was an exceptional year for the typical investor, there is no telling what 2015 will bring. It could conceivably be an extension of what we experienced in 2014 or we could see and experience a major correction. That is part of what makes investing so exciting and that is that it is a complete unknown and the best any of us can hope to do is perform our due diligence and maintain our edge on the markets through proper research. Keep up with your fundamentals and remember the concept of buy and hold is a thing of the past. You must buy and do your homework in the event a well-run or excellent business turns around and heads south. I remember about eight years ago I forgot this rule, and I got extremely greedy in regards to a particular stock I owned. It was up way beyond my wildest dreams and then reported a poor quarter with regards to earnings. That should have been my queue to exit the stock, but I was greedy and thought it will bounce back. At the time of the one negative quarter of earnings, it was trading above $70 a share. After the announcement of the bad quarter, it dropped to about $60 a share. Even at that point I would have made good money but I did not do my homework and did not follow the news on the company and after its second poor quarter it dropped to under $15 a share where it basically remains today. Learn from others and myself and do not buy and hold with the hopes something will turn around. Do your homework on a constant basis and keep abreast of any potentially negative news.
If you have any topics that you want addressed in 2015, please do not hesitate to contact me, and I will do my best to incorporate them into a blog. And as always I am here if you have any questions or comments on any of my posts. I wish you and your family the best in 2015, and I look forward to another exciting year!
