The World Is Changing - Is Your Portfolio Prepared?

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Hockey legend Wayne Gretzky noted that good players skate where the puck is, but great players skate where the puck is going to be. In hockey, like in investing, the puck doesn’t always go where you expect. And since the pace of change worldwide seems to be accelerating, you’ll want to properly position your portfolio for what’s ahead.

5 noteworthy trends

  1. Synchronized rebound in global growth – The Trump administration is slowly moving forward on three eagerly awaited pro-growth policies: tax cuts, regulatory relief and infrastructure spending. We think domestic economic growth remains solid, even if these pro-growth policies are delayed and diluted, mostly improving the 2018 outlook. Prospects for global growth have brightened, as the chart shows, helped by extremely low interest rates and accommodative policies in many foreign countries.

    world-gdp-charts
    Source: Bloomberg,OECD estimates.

  2. Interest rates edging up – The Federal Reserve (Fed) plans to continue to hike short-term interest rates slowly and cautiously in response to improving economic growth. With inflation returning to around 2%, we expect long-term rates to rise modestly as well. And while they’re still lower, rates have risen overseas, too.
  3. Disruptive technologies – Artificial intelligence, self-driving vehicles, online/smartphone sales and other new technologies are disrupting current business models and accelerating the pace of change in jobs, transportation and how we shop.
  4. Elections prompt changes – Heightened nationalism and populism may mean policy changes ahead, including more restrictions on global trade and immigration. The impacts could be significant for specific sectors or companies.
  5. Higher geopolitical risks – Global hot spots seem to be erupting more frequently, increasing the possibility of more military conflicts and perhaps economic disruptions.

Are you skating in the right direction?

Thinking about how the world is changing may remind you about other changes in your situation or financial goals. Make sure you address those as you work with your financial advisor to help keep your portfolio positioned wherever the puck is going to be. We recommend three actions:

  1. Rebalance. Despite these shifts and trends, financial markets have remained calm and reacted mildly. But calm conditions may not continue. Start by reviewing whether your portfolio still has the right mix of stocks and bonds for your situation and comfort with volatility. Since stocks have performed well, you may need to rebalance by adding fixed-income investments. Although bond returns were lower when interest rates were rising modestly in the past, they can play an important role in your portfolio by helping reduce the impact of stock market declines.
  2. Reposition your portfolio to benefit by adding small- and mid-cap stocks, which historically have performed better when economic growth accelerated. Better global growth also can be a catalyst for international equity investments. And we recommend reducing high-yield bonds, which no longer appear to compensate sufficiently for their higher risk. You may also want enough cash on hand so you can add to stocks or bonds whenever their prices decline.
  3. Refresh by adding laggards. Many investments that lagged earlier in this expansion have started to rebound, including international developed-market equity investments. And better-performing investments may now make up too much of your portfolio. Adding laggards and trimming overweight investments can help reduce the potential impacts of disruptive technologies and events, such as elections or conflicts.

We see signs of a synchronized rebound in global growth, propelled by low interest rates and brighter prospects. But U.S. interest rates have already started to rise slowly, and markets could be more volatile ahead. Disruptive technologies as well as possible tax and trade policies may affect your job as well as your shopping. Review your investments and make adjustments if needed to help keep them well-positioned for what’s ahead, rather than where the puck has been.

Important information:

Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.

Small- and mid-cap stocks tend to be more volatile than large company stocks.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

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