Investors Concerned With Traditional Investments’ Performance

An increasing number of investors are growing concerned about the performance of the traditional investments in their portfolio; in particular, their stocks and bonds. Their foremost concerns are that stocks are overvalued and bonds are risky These are two very unappealing scenarios for cautious investors.

Stock Market

In recent years, countless investing surveys have been conducted. Of the people who responded, nearly half believed that the stock market is overvalued. According to the analysts, the current market is the second longest Bull Market of all time. Historically, the S&P 500’s mean P/E ratio is approximately 15. At the moment, it is in the mid-twenties.

Some financial advisers are of the belief that the markets are overdue for a pullback. With that being said, many believe it will emerge as a correction within the existing Bull market, and not surprise the world with another global financial crisis. Many are saying that they expect to see a 5% to 10% pullback in the stock market.

Bonds

Interest rates and bond prices enjoy an inverse relationship. As interest rates rise, the price of bonds is likely to fall. Conversely, when interest rates fall, the price of bonds trading in the marketplace generally rises. Also, if the cost of living and inflation increase dramatically, and at a faster rate than income investment, investors will see their purchasing power erode and may actually see a negative rate of return.

Aside from interest rate risk, which is the most widely-known of risks in the bond market, reinvestment, default, and liquidity risk should also be closely considered when choosing whether or not to pursue a bond investment.

Alternatives

In recent years, alternative investments have found an important place in a well-balanced investment portfolio. The investment community has taken the opportunity to invest in containers and other hard assets, that emerged relatively unscathed from the last financial crisis. In the absence of viable options from traditional investments, investment-seekers are finding alternative investments to be much more appealing.

Stock Valuations Are Highly Subjective And Overvalued

History has demonstrated that stock valuations are highly subjective, and that markets can easily become significantly overvalued before a long-running Bull Market ends. This is cause for concern, as today’s stock markets continue to spring higher and higher.

Naturally, the market’s high valuation is a concern, but it’s my view that it’s been overvalued for about three years.  Over that time period, the S&P 500 has gone up 30 percent. – David Ott, Partner, Acropolis Investment Management

This market is the second longest Bull Market of all time. Historically, the S&P 500’s mean P/E ratio is approximately 15. At the moment, it is in the mid-20’s. The last two times the S&P 500’s P/E ratio hit the mid to upper 20’s was in the late 1920’s and the late 1990’s. Investors who have done their investment research know very well what followed shortly after that.

This does not necessarily mean that the market will crash tomorrow. The past has also shown us that market valuations can continue to stretch for quite a period of time. Although at this point some money managers and advisers believe the markets are overdue for a pullback, many continue to believe it will emerge as a correction within the existing Bull market and not a crash. Many expect to see a 5% to 10% pullback in the stock market based on the current high yield spread.

Generally speaking, U.S. stocks are overvalued and International stocks are undervalued. With that being said, a globally diversified investment portfolio that includes 20% to 30% international assets will outperform the S&P 500 over the next three to five years. In fact, it is expected that a well-balanced portfolio with safe, income-generating investments will deliver steady returns over the next five to seven years.

Strategies to Manage Risks of Investing in The Stock Market

There are many country specific and industry specific risks when investing. Because there is a tentative relationship between the government and businesses, there is always a risk that government actions could constrain an industry or corporation. Likewise, business executives could make poor decisions or get caught-up in a scandal. Without a doubt, such actions would adversely affect an investor’s holdings in that business and/or sector.

As an investor, the best thing you can do is read reviews, educate yourself and know the risks before investing in something. This cautious approach will encourage you to:

  1. Seek Advice
  2. Diversify Your Portfolio
  3. Make a Long-Term Commitment

Strategy One: Seek Advice.

When you don’t understand how the stock market works – like what makes a stock’s price rise or fall, it becomes an especially risky investment. The more you know, the more you can lower this risk.

If you don’t feel comfortable with your understanding of an investment, ask experienced investors to help you choose stocks and other alternatives that help you achieve your financial goals, as well as meet your tolerance for risk.

Strategy Two: Diversify Your Stock Portfolio.

You can reduce your overall risk by owning stock in companies of different sizes and different industries. As well, different types of stock offer fixed returns that can be counted upon to offset losses in other investment areas.

  • Type of industry – While companies in one industry may be struggling, companies in another industry may be performing well. For example, manufacturing stocks might slump when technology stocks rise.
  • Company size – Investing in a small, new company has the potential for higher growth. That said, it is usually riskier than a larger, more established company would be.
  • Type of stock – Preferred shares tend to offer lower risk and returns than common shares. But, unlike common shares, preferred shares pay a fixed dividend. You may want to choose both for your portfolio.

Strategy Three: Make a Long-Term Commitment.

As I am sure you are aware from the recent U.S. elections and the Brexit vote, the stock market is subject to short-term fluctuations and bear markets. Volatility aside, historically the stock market has performed well over the long term.

Because of the uncertainty associated with the stock market do not invest with money that you will need back soon. If you do, you run the risk of being forced to sell during a period when a stock’s price is low.

When risks affect the market or the economy, investors must rely upon their well-constructed portfolio to protect their investments. Making educated investment decisions that work toward your goals, and are mindful of your exposure to adverse conditions, will keep investing risks at an acceptable level.