OUTLOOK FINANCE

WHAT’S AHEAD FOR 2013?

WRITER: ELLEN B WILCOX, GEPC

It has been theorized that one of the leading New Year’s resolutions is to handle financial matters more carefully and astutely. If this is one of your goals for this New Year, I hope you will read on with great interest.

To be sure, the past five years have not been financially healthy for many.

Unemployment, crashing home values, and market uncertainty have all raged. At times there have been glimmers of hope, but nothing truly reversing the overall trends. Indeed, neither monetary policy nor massive government stimulus money has produced or sustained a much-needed return to economic growth and stability.

It is widely believed that the year 2013 may find many different forces influencing financial markets. Portfolio growth is apt to hover in the low single digits in the U.S. stock and bond markets. The key approach investors need to embrace will surely be the avoidance of losses. To quote an astute football coach, “The best offense is a good defense!” In other words, protection of existing assets should be at the top of the to-do list for investors. This may seem like a negative approach, but I believe it will be an important direction for most.

Investor confidence has not been running high in recent months, and federally determined fiscal policies will have the power either to enhance or to further depress that outlook in the early months of this year. Along with U.S. policies, there will remain the issues already well-known and highly scrutinized in Western Europe.

With the recently re-elected president now being supported by a majority in both houses of Congress, it is likely that at least some of the key monetary policies and policy makers will remain in place. This brings at least the likelihood that interest rates will remain relatively low, as well as stable, throughout the year. This could bode well for home buyers, which would in turn reduce the current inventory. There is already a modicum of joy emanating from home builders with new construction showing a modest uptick. At odds with this, however, is that credit will not be easy to acquire for the average citizen.

This could curtail consumer spending.

Tax rates will also affect spending patterns for most Americans. Regardless of the exact percentages recently put forth, there will most probably be little immediate effect but rather a gradual change. This could encourage retailers to keep prices low, facilitate frequent sales, and reduce inventories. Anything curtailing inventories will also curtail manufacturing, so don’t expect to see a robust uptick in new job openings.

U.S. investment markets, both stock and bond markets, may be in for a bumpy ride, at least until Washington embarks on a clear path to avoid severe recession and restore economic stability. In the domestic stock market, companies paying dividends should be more desirable for most investors. Generally speaking, this means large U.S.-based multinationals. Look for those providing goods and services that we all need and use daily. I often refer to these companies as “the household names we all know and love.”

One caution on the dividendpaying corporations: Corporate tax changes handed down by government could discourage some companies from paying dividends. This may be especially true for those companies that just recently began paying dividends. If the new-to-dividendpaying corporations opt out because their tax break is diminished, the effect could be to enhance the popularity of the remaining dividend-paying companies, thus possibly pushing their share prices up. (Remember that the stock market operates in a “supply and demand” mode!)

For investors considering bonds, the basic watchwords are always credit risk and interest-rate risk. Another consideration is long-term versus short(er)-term. Putting it all together to achieve an acceptable rate of return, as well as an appropriate risk tolerance, may necessitate a serious look in the mirror and a pragmatic visit with a competent financial adviser. In general, shorter terms and slightly higher risk bonds tend to perform in periods of low inflation. As inflation risks rise, reverse strategies may be needed.

With more than thirty years of experience as an adviser, I can say without hesitation that for nearly all investors bonds are the least understood entity. If you have resolved to enhance your financial well-being in this New Year, make it your goal to learn more about bonds. This is crucial to strategic investment planning.

Another key element to all investment planning is balance. It is important to “cover all bases” when constructing a portfolio, whether your goal is growth or income (or a combination of both). This means considering the inclusion of foreign investments in your portfolio. For 2013, most investors should think about keeping their overall percentage of foreign investment below seven percent. Even for the risk averse, it is best not to eliminate the category or asset class altogether. Just be sure to understand the risks and the uncertainty of world political and economic conditions.

Finally, I would caution all investors to remain flexible. To sum it up, the year 2013 provides both challenges and opportunities. The challenges are to remain confident in our capital markets and to retain a positive outlook toward our personal and national commitment to restoring economic stability. Given such a positive and confident outlook, I believe the opportunities will present themselves. My own New Year’s resolution is to remain open to those opportunities for myself and for each of my clients so that our goals and objectives will be pursued and ultimately achieved. I wish the same for each of you.