Mid-year check-in: 5 portfolio moves for the second half of 2014 (Part 3 of 4)
As for what this means for investors, to navigate in this market environment, we suggest focusing on five portfolio moves.
1. Favor stocks with a caveat. While stocks aren’t cheap, we don’t believe they’re in a bubble. Rather, their value is perhaps best characterized as “not unreasonable,” particularly given the low inflation environment. As the economy improves, we believe stocks have room to move higher this year. In addition, they still appear more attractive than the alternatives, notably cash (SHY) and bonds. But given that many areas of the market do look expensive, a selective approach is key. We would focus on those market segments that offer good value and potential downside protection, such as large- and mega-cap stocks, cyclical sectors and international equities.
Market Realist – Skeptics have expressed concerns about whether the rally has made stocks overvalued and potentially vulnerable to a decline. But there’s no cause for alarm yet.
The stock market value of the companies in the S&P 500 (SPY) is 16.5 times the 2014 profits. This isn’t particularly high by historical standards. Valuations aren’t extreme by any means, as market valuations are hovering very near historical averages.
You need to be careful, though, with biotechnology and Internet stocks. The Nasdaq Biotechnology Index (IBB) is up 14% this year despite more than two-thirds of the 122 companies it tracks not earning any money in the last 12 months. The graph below shows the price rise of the iShares NASDAQ Biotechnology Index Fund (IBB).
2. Make sure you have sufficient exposure to international equities. Today, most of the stock market bargains are found overseas. So, while increasing international exposure makes sense in general, it makes even more sense these days. We would encourage investors to consider investing in international developed equities, particularly those in Europe (EZU) and Japan (EWJ), as well as in select emerging markets (EEM).
Market Realist – The following graph tracks the performance of the iShares MSCI EMU Index Fund (EMU), iShares MSCI Japan Index Fund (EWJ), and iShares MSCI Emerging Markets ETF (EEM).
Market Realist – Read on to the next part of this series for more essential smart moves for your portfolio.
Browse this series on Market Realist:
- Part 1 - Mid-year check-in: 5 portfolio moves for the second half of 2014
- Part 2 - A must-know investor outlook for the second half of 2014
- Part 4 - Essential smart moves for your portfolio in 2014
- Mutual Funds