By most measures, 2017 was a pretty good year for investors. But what can you expect in 2018?
It’s difficult to precisely predict the immediate future of the financial markets. However, many signs point to improved global economic growth and rising corporate earnings – both of which are important drivers of stock prices. In the United States, economic growth may be more modest than in other regions, which could result in international stocks outperforming domestic ones.
Here’s another consideration: Low interest rates typically benefit the financial markets – and unless inflation jumps sharply, the Federal Reserve will probably remain patient, only raising short-term rates slowly throughout 2018.
Despite these positive signs, there’s also reason for caution. Political uncertainty and changes in economic policies may lead to increased market volatility. Another factor is the long-term history of the stock market, which includes a drop of 10% or more – technically called a “correction” – about once a year. We’ve gone two years since the last correction, so it would not be surprising if we saw one in 2018.
Given this outlook – which could be classified as “moderately optimistic” – what investment moves should you consider this year? Here are a few suggestions:
Rebalance your portfolio – The market’s gains may have increased the value of your stocks so much that they now represent a greater percentage of your portfolio than you had intended – and you may not be comfortable with this increased presence.
So, you may want to rebalance your portfolio to achieve a suitable mix of stocks and bonds, based on your goals, risk tolerance and time horizon. As part of this rebalancing, and in an effort to help reduce the impact of market volatility, you may need to add investment-grade bonds and cash investments. (Of course, bonds carry some risks, too, including interest rate risk and credit risk.) The availability of cash will also make it easier for you to purchase stocks during a market downturn, when prices may be lower.
Look beyond U.S. borders – You may want to consider adding some international equity investments to your portfolio, if appropriate. As mentioned above, these stocks may do better than U.S. stocks in 2018, but regardless of performance, the presence of global stocks can help diversify your portfolio – and diversification can help decrease your overall risk level. (However, diversification can’t guarantee profits or protect against all losses.) Keep in mind that international investing carries some inherent risks, such as those related to currency fluctuations and foreign political and economic events.
Be aware of “big” versus “little” – If you don’t own many stocks of smaller companies, you might consider adding them to your portfolio. Smaller U.S. stocks have traditionally outperformed larger ones and may benefit from stronger economic growth and lower corporate tax rates. Be aware, though that small company stocks tend to be more volatile than those of larger companies. And, as with all stock investments, you may risk losing some or all of your principal.
You may want to consult with a financial professional to determine which of these moves, or any others, are right for you. You can’t control the external factors affecting the financial markets, but you can take total charge of your own investment decisions – and in the long run, these decisions can help determine your success as an investor.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.