Potential investment themes for 2014

In January of last year, I wrote a piece on what I thought would be reasonable investment and economic themes for 2013 that might affect your planning. You can read that here.

I then graded myself last month. You can read that here. I did okay. I aced some themes, but I failed on a few others. I’m a glutton for punishment, so I think it’s worth trying again for 2014. 

Before I get to that, though, I want to express a quick thanks to an anonymous reader who posted on Dec. 20. I thought the individual’s comments about long-term trends regarding the high poverty rate in the U.S. and its potential impact on human capital were very insightful. I also appreciated the reader’s observations on “collectible” markets and his or her questions about the impact of changes in energy production on rural housing. I unfortunately am not qualified to further opine in any of those areas, but I appreciated the discussion because it was outside of my scope, and it certainly enhanced the experience for me. Comments like that are always welcome. 

Back to 2014. As I mentioned last year, as a house philosophy, we work with what we know today, don’t try to predict unknown events, and then course-correct when life happens. That said, thinking about potential future scenarios is what planning is really all about. As I look forward to 2014, here are some themes I think are worth considering in making plans. 

(Disclaimer: I’m not good at making predictions; the reality is that no one successfully predicts anything on a consistent basis, let alone is able to then profit from it. Most folks who are perceived as smart are often just lucky or have said the same thing for five, 10, or 20 years and were finally able to be right. As they say, “Being early is the same as being wrong.” Feel free to agree or disagree and opine intelligently why.)


In no particular order:

1. Interest rates may not rise as much as people think, and they may even fall. Yeah, I’m starting with a really gutsy suggestion here, but here’s my logic: EVERYONE ON THE PLANET THINKS RATES HAVE TO RISE! That’s a really big one-sided trade. I think there are only a few people out there thinking, “What if that doesn’t happen?” When everyone thinks one thing, it’s common for another thing to happen. Consequently, when putting together a financial plan, I think it’s worth considering the possibility that interest won’t rise. Sure, you should also consider the possibility that they will, but I think it’s illogical to make such a big one-sided bet. (I penned this thought a couple weeks ago when rates were at about 3% on the 10-year Treasury. Today, they’re back down to 2.7%, or a 10% decrease.)

2. However, as I mentioned last year, as long as interest rates stay low, investors will continue to look for yield and higher returns elsewhere. Central bank policy has forced savers to take a lot of risk or take a major pay cut in their income from their portfolio. Gone are the days of three- to five-year CD ladders paying 3% to 5%. Today, to get 3% to 5%, you need to chase yield in high-yield and other high-risk credit. This is a big problem. It’s definitely worth considering in your plan: Do I accept a pay cut on my income by buying 1% CDs or do I take a much higher degree of risk to get what I was once used to? It’s a very complex issue. Barring a major risk event, I suspect people will unfortunately have to continue to chase the yield. Be cautious.

3. The U.S. and other developed stock markets may pull back. Broadly speaking, we’re now almost five years into a major global stock bull run (depending on your starting point). I’m also recently reading about high levels of complacency and a more aggressive tone from retail investors as a group compared to a few years ago. Historically speaking, bear markets show up about once every three to six years. Maybe we’ll have another strong year (I am a horrible market timer, mind you!), but consider in your planning the possibility of a market correction. Could you handle it? (Again, I penned this in early January, and last week was a good example of a pullback.)

4. The least-loved investments of 2013 may be some of the most loved by the end of 2014. Again, when everyone loves something, you often run out of buyers on the way up, and when everyone hates something, you have no one to sell to on the way down. (This is technically not accurate because in a bid marketplace, there is always a buyer and seller, but the idea is that the herd can chase returns up and down without logic.) Absent an all-out destruction of capital markets, the least-loved investment concepts may see a turnaround in the near future. Of course, I would never bet the farm on this idea, but in a disciplined, rebalanced, diversified portfolio, one may be able to passively buy some more of these least-loved investments and sell a portion of the most-loved, subsequently giving yourself the chance of avoiding a ride with the herds and hopefully enhancing your long-term returns. Over time, the herds do a horrible job of enhancing returns.

5. Another repeat theme from 2013: The U.S. will continue to lose its pole position in relation to other countries. I was both right and wrong about this last year. I was right in terms of economic GDP growth, wrong if you used the stock market as a benchmark. But as I mentioned last year, I’m not anti-U.S.; I’m a strong optimist about the U.S.’s future while our support of free property rights remains one of the strongest in the world. But one can’t deny the fact that we’re heavily indebted as a nation, have expensive entitlement programs, and have one of the lowest workforce participation rates in our history. This simply doesn’t bode well for relative growth. We have less capital to invest in productive enterprises. Other countries without as much debt will have the opportunity to grow their countries relative to the U.S. and other indebted nations, assuming their markets are free as well. When thinking about your plans, are you basing them all on a U.S.-centric outlook?

(Continued)

6. The student loan bubble is now more than $1 trillion, with a relatively high late-payment rate. I thought this would pop in 2013, but I was wrong. I have learned from my mistake here and don’t want to predict whether or when it may pop because it seems like this could go on for a while, but if it pops or adjusts, it will have an impact on college costs and college funding. Think of student loans like mortgage debt. When the mortgage markets were running out of control through the 2000s, what happened to the housing markets? They bubbled in value. When college costs are allowed to outrun inflation, fueled by easy student-lending credit, it gets to a point where the system may no longer be sustainable. And if the student loan bubble pops, expect to see major changes in how universities and other institutions of higher learning (tech schools included) deal with a potentially major loss of funding.  

7. The housing market in Dane County continues to look reasonable if not good given what my developer and real estate colleagues are telling me about a limited supply of housing coupled with a pretty strong economy and still relatively low interest rates. However, the housing market in parts of the country that experienced bubble-like valuations five years ago (Florida, Arizona, etc.) looks kind of expensive again, with an odd demand landscape. From what I can gather, those markets had huge run-ups on valuation in the past few years, largely due to recycling foreclosures. But we also have a strong return of subprime debt and a large influence of “all cash” investment buyers, while debt-to-income ratios are on the rise again. Of course, this is offset by the now extreme difficulty of getting a mortgage due to Dodd-Frank regulations, along with slightly higher interest rates on traditional mortgages. But the point is, a home has never been an investment; it’s a store of value that if purchased well should allow you to sustain a better quality of life in the future compared to not owning at all. Purchasing well means being conscious of ownership costs relative to income and the amount of time you’ll live there. Given that the purchase of a home could be one of the largest expenses of your life, buying a home should always be done with prudence.

8. My “what keeps me up at night theme” would be some sort of new war or environmental disaster. For example, I’ve been very concerned about the Fukushima Daiichi nuclear plant disaster of 2011 and its ongoing effects on the planet. It gets very little media attention but has global long-term implications on the environment and our quality of life. Perhaps 2014 could be the year the world understands the ongoing devastation Fukushima is causing around the globe. Along the same lines, I think the Japanese/Chinese conflicts are real. Maybe they’ll lead to nothing, but maybe they’ll become disruptive in the long term. I would rather not have to consider the possibility of economic, political, or environmental disruptions, but if you study history at even a cursory level, you know that these types of events actually occur with regularity and can have sizeable impacts on our future plans.

9. Another repeat from last year, because it’s just too easy: There will be another manufactured economic crisis that the media and politicians will exploit, and some folks will overreact to it, making some very bad decisions with their money as a result.

10. Finally, another self-indulgent softball from 2013: Some asset classes will rise, some will fall. Diversification will still be the middle ground, which works for most. (I cut-and-pasted that one.)

As usual, it’s now your turn to opine. 

Michael Dubis is a fee-only certified financial planner and president of Michael A. Dubis Financial Planning, LLC. He is also an adjunct lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at financialperspectives@gmail.com.

 This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this website or that of the author’s. Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio's performance are based on historical data and one should not assume that this performance will continue in the future.
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