Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
As I head into each new year, I like to identify the most useful piece of advice from the past 12 months. This year’s winner comes in the form of a reminder from John Bogle, founder of The Vanguard mutual funds. Bogle points out that the stock market produces nothing. It is simply a reflection of how businesses in America perform over time. As it stands, earnings growth has averaged a very stable 6%, while dividends have averaged 3%. Put the two together, and you arrive at a long-term average rate of return at about 9%.
Will this 100-year trend change in the coming decade? I don’t think so. I believe the cornerstones of America’s long-term economic success – innovation, hard work and entrepreneurial spirit – are still solidly in place. So I expect continued growth for the U.S. economy over time.
But what about 2011? Here are 11 important themes that I am watching this year:
1. The Stock Market – Look for continued strength then the potential for a correction late in the year and into early 2012. I expect to see markets finish in the high single digits for the year. Regardless of the timing, long-term investors should press on.
2. Bonds and Interest Rates – Interest rates could easily rise to a 4%+ yield on the 10-year Treasury. This means bond holders and income investors should keep your bond maturities LOW and your stock dividends HIGH. Floating rate bonds should continue to offer a hedge against rising rates.
3. Inflation – Commodity prices have been soaring. Toward the end of 2010, silver prices were up 65%, gold: 23%, copper: 34%, corn: 49%, cotton: 90%, just to name a few. This trend might translate into inflation during 2011.
4. The Economy – We are technically nearly two years into a moderate economic recovery – though many individual wallets don’t feel that way yet. GDP (total output for the U.S. economy) has grown for five and soon to be six consecutive quarters. With Washington keeping taxes lower, and 9 out of 10 leading indicators (manufacturing, jobless claims, money supply, etc.) pointed higher, we could see 4%+ real GDP growth for the U.S.
5. Jobs – Jobless claims continued to trend lower in 2010. While more than 15 million people are still unemployed in the U.S., we did add nearly 1 million jobs in 2010. As GDP grows in 2011, that trend will continue. Businesses will soon have to start hiring in order to expand. Couple that with lower tax rates for small business owners and an increase in business confidence and we could see the unemployment rate drop below 9%.
6. Housing – This sector will experience continued pain. Despite considerable fluctuations, I expect home prices to remain flat year-over-year. Mortgage rates will continue to tick up if the 10-year Treasury yield hits 4%. But the cost of borrowing will remain at relatively low historical rates. This will help home builders and sellers; but it is hard to see prices rising given the high level of housing inventory.
7. Sectors – If my inflation and economic calls are correct, the energy sector should have a strong year. There are 95 million baby boomers on the verge of retirement seeking the kind of yield available with utility stocks. If financials are able to continue raising dividends, this sector might also benefit from the hunt for yield.
8. Small vs. Large – In 2010 small and mid-cap stocks had returns nearly double those of the very large companies that make up the Dow Jones Industrial Average. In 2011 that trend could reverse.
9. Banks Raise Dividends – Big banks and financial companies used to be a solid bet for retirees seeking dividend yield. The financial crisis changed that. We already see banks starting to restore their pre-crisis dividend yields, but they still have a long way to go. This dividend restoration should continue for the financial sector.
10. Asset Allocation – Spreading your investments across markets and investment types will continue to provide protection for your nest egg. At CIA, we call this the “bucket approach” to investing. Placing your money in a combination of cash, income, growth and alternative income buckets can smooth out your overall portfolio volatility.
11. Income Investing – This strategy will continue to play a huge role in total return. Income comes from three places: dividends from stocks, interest from bonds and distributions from alternative investments like MLP stocks, closed end funds and Energy Royalty Trusts. Together they add up to your “portfolio yield.” Unlike the stock market, your portfolio yield is highly predictable from year to year.
Much of the above makes sense even if interest rates don’t go through the roof and even if the economy doesn’t perform as well as I think it will. Fundamentals like asset allocation, owning high quality dividend-paying stocks, investing for income/yield, and hedging against inflation should always make it into the playbook for long-term investors.
I am looking forward to a happy and healthy 2011, and I wish you and your family the same.
- By Wes Moss, for Atlanta Bargain Hunter blog