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 continue, supported by above-average but slower economic and earnings growth. 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 continues, expectations appear too pessimistic and equity valuations have improved.

Asset class diversification

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

Growth (Target = Middle): U.S. small- and mid-cap stocks dropped more than large-cap stocks and are more attractively valued. 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. Below-average valuations for large-cap U.S. stocks do not reflect our expectations for above-average but slower economic and earnings growth. We recommend overweighting international developed-market large-cap equities because expectations are low, dividend yields are attractive, and we expect modest earnings and economic growth to continue.

Income (Target = Low): Long-term interest rates tend to move with inflation, which should rise slightly as labor markets tighten. Higher short-term interest rates make them relatively attractive. But rates on high-yield bonds aren’t high enough to compensate for 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 to reduce the impact of rising interest rates and to use to invest 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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