Asset Class Outlook

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, and the Federal Reserve’s pause is likely to keep interest rates relatively flat for a while. A laddered bond portfolio and an above-average amount in cash may help provide downside protection for portfolios when markets are volatile.

Domestic versus International (Target = Middle) –We recommend overweighting international equities (including emerging-market stocks) 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 but recommend adding emerging-market equities, which we think are attractively valued, don’t reflect early signs of improving global growth and could benefit if trade tensions begin to ease.

Growth (Target = Middle): U.S. small- and mid-cap stocks are still attractively valued compared to large-cap stocks and well-positioned when interest rates stay low and the economy grows modesty as we expect. 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 and U.S. large-cap stocks. We recommend overweighting international developed-market large-cap equities because expectations are low, dividend yields are attractive, and we expect them to benefit from slowly improving global economic growth.

Income (Target = Low): Long-term interest rates tend to move with inflation, which should rise slightly as labor markets tighten. The aggressive income target is middle because rates on high-yield bonds have increased enough to compensate for their additional risk, and default rates remain low. We think international fixed income looks relatively unattractive due to very low foreign interest rates.

Cash (Target = High): We recommend overweighting cash to cover short-term expenses and 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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