Asset Class Outlook

Target Guidance by Investment Category chart

1 Alternative Investments and Stocks trading less than $4 align with the aggressive investment category, but they are not recommended.

2 Large-cap stocks that do not pay a dividend are in the Growth investment category.

Asset classes we don’t recommend separately include alternative investments, micro-cap equities and international high-yield bonds.

Equity versus Fixed Income (Target = Middle) – We think the bull market in stocks can run further, supported by stronger economic growth and double-digit increases in corporate profits, helped by the tax cuts. Interest rates remain low but are likely to continue to rise slowly. A laddered bond portfolio and an above-average amount in cash may help provide downside protection for portfolios as volatility picks up.

Domestic versus International (Target = Middle) – We recommend overweighting international equities and underweighting international fixed income as global growth remains solid.

Asset class diversification

Aggressive (Target = Middle): We remain cautious on commodity investments despite the sharp rise in oil prices. The drop in emerging-market equities reflects the stronger dollar and worries about possible trade disruptions. We think the pullback is an opportunity and recommend a small allocation.

Growth (Target = Middle): U.S. small- and mid-cap stocks are attractive because they appear well-positioned to benefit from lower corporate tax rates and accelerating economic growth. Opportunities and risks appear balanced for international small-cap stocks.

Growth & Income (Target = Middle): We think risks and opportunities are balanced for real estate investments. Above-average valuations for large-cap U.S. stocks already reflect our expectations for improving economic growth and rising earnings, reducing our long-term return expectations. We recommend overweighting international developed-market large-cap equities because expectations are low, dividend yields are attractive, and we expect solid earnings and economic growth to continue.

Income (Target = Low): Long-term interest rates tend to move with inflation, which should rise slightly as growth improves. Higher short-term interest rates make them attractive. But rates on high-yield bonds have fallen despite their additional risk, so the aggressive-income target is low. We think international fixed income looks relatively unattractive due to low foreign interest rates that also have started to rise slowly.

Cash (Target = High): We recommend overweighting cash, having enough to cover short-term expenses and investing during pullbacks.

Important Information:

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal. The prices of small-cap, mid-cap and emerging-market stocks are generally more volatile than those of 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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