Investing in 2013: What to Look For
As we embark on a new year, it is always good to take a look at where we have been in order to assess where we may be going when it comes to investing. If we keep a focus on three traditional areas of investment, it will be easier to keep track of what is happening and where we may want to allocate our investment dollars. Considering the stock market (equities), the bond market (fixed income investments), and real estate (both for personal use and as income property), we cover a very large portion of potential investment vehicles.Equities
Looking at the equities market, it should be noted that we have actually advanced over 100% from the 2009 levels basis the S&P 500 index, the most widely referenced index for stock market performance. While this fact may throw up some cautionary flags, it cannot be ignored that the government stimulus packages and the low interest rate environment fostered by the Federal Reserve Bank (the FED), have certainly contributed to a robust equities market. However, the fact is that many investors have remained on the sidelines during this period, favoring investments in bonds or simple cash deposits. What typically happens in this type of environment is that small investors like ourselves begin to feel "left out" of the positive gains in equities and begin to purchase stocks just as the market is ready to take a breather and retreat 10- 20%.
Even in the face of the possible corrective phase, there are still potentially good equity investments as measured by the traditional means of sales, earnings, dividend payments, etc. It is prudent at this stage of the market life cycle to consult with professional analysts such as the experienced CFS Financial Advisors* at BCU to lay out a plan for purchases based on opportunities which may present themselves. Opportunity may arise through any overall market correction to the downside, or simply on the merits of a particular company's current financials.
Fixed Income Investments
Looking at fixed income investments such as government bonds, municipal bonds, or high grade corporate bonds, it is very important to understand the inverse relationship between yields and price. Simply stated, as interest rates go up, bond prices go down. Conversely, as interest rates go down, bond prices go up. This correlation is a direct result of the fact that bonds are generally sold with a stated interest rate or yield. If interest rates are declining, bonds with higher interest rates (yields) become more valuable as the holder will continue to collect a cash flow based on the stated rate of the bond. If interest rates begin to climb, then bonds with lower yields will begin to decline in value in favor of the higher yielding current bond issues. Since we have been at record low interest rates for several years (near zero), it is logical to assume that when rates begin to increase the overall bond market will decline.
So, looking at the bond market from the perspective of interest rates having been pushed down to the lowest levels in history, we can assume that there will be dramatic shifts from investors selling bonds and reinvesting those dollars. Many analysts feel that this is inevitably good for the stock market because investors will want to achieve returns of greater than the 2 - 3% offered by bonds. In fact, if the average investor moves money from bonds to stocks in 2013, that fact alone could trigger the continuation of stock prices to rally.
Looking at the real estate market, I had written in earlier columns that the last year has presented tremendous opportunity. This opportunity is likely to continue through at least the first half of 2013, with low interest rates and high availability of property. You may recall that my main caveat for purchasing personal real estate (an owner occupied home), has been the willingness of buyers to withstand the possibility of some further weakness. Therefore, I suggested some guidelines: Have sufficient down payment to secure a traditional mortgage, plan to remain in the home for at least five years and to stay current on all mortgage and real estate tax payments. So, for new buyers of owner occupied real estate, this could be a very opportune time.
Looking at real estate as a possible investment, it is well worth doing an analysis of rental prices in your market area. Demand for rental property has continued to climb in every month throughout the recession. Those who have been displaced through foreclosure as well as those finding stricter new requirements for mortgage approval have been redirected to the rental market. If opportunity presents itself in your economic region to acquire rental property, 2013 may be a pivotal year, with the costs of acquiring rental property still offering a much more attractive return than traditional cash deposits or the bond market.
2013 may prove to be as challenging as any of the last five years. However, we now have a better handle on the many variables which affect our investment s—and therefore a better chance for success. The one cloud on the horizon continues to be government action, or inaction. The debt ceiling issue and the eventual resolution of all of the "fiscal cliff" issues, which were postponed, warrant ongoing scrutiny.
©Patrick J. Catania 2013
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.
*Non-deposit investment products and services offered through CUSO Financial Services, L.P. (CFS, a registered broker-dealer (Member FINRA/SIPC) SEC and Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the Credit Union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. BCU has contracted with CFS to make non-deposit investment products and services available to Credit Union members. BCU Investment Advisors is a trade name for the investment services available at BCU.