With the dawn of a new year, financial experts making predictions for 2013 – where to invest, how much and the riskiest moves. Though Durango is far removed from Wall Street, local financial planners are part of the conversation.
This year is starting on more stable footing than 2012, when uncertainty reigned for issues such as new leadership in the United States and the European debt crisis, said Paul Lemon, certified financial planner and personal financial specialist with Integrated Financial Planning.
“The stock market doesn’t like uncertainty, and just the fact that there is a little more certainty, I do see room for some improvement,” Lemon said. “We are in a little better spot than in 2012.”
But legislators’ approval of a deal to avert the fiscal cliff was only the first step, and there still are many decisions to be made on Capitol Hill that could sway financial markets in the coming year, said Stan Johnson, a registered investment adviser and certified financial planner with Comprehensive Financial Planning in Durango.
The tax deal left a lot of issues untouched, which means legislators will have to take on thorny issues such as tax-code reform, debt limits and entitlements in the coming year, all of which could affect the markets in any number of ways, Johnson said.
“The federal government dealt with a small portion of what they needed to deal with, and the markets are paying attention,” he said.
Since the downturn in the market, many people have turned to bonds as a safer alternative to the stock market, but many investors don’t recognize the risks associated with bonds, which could have negative repercussions down the road, Johnson said.
Because the market price of bonds is inversely related to interest rates, bonds and bond funds could lose value if interest rates rise from their record low levels. It is inevitable that those rates will rise, but when is “anybody’s guess,” Johnson said.
“People have this distorted idea that bonds are safe, and there’s nothing farther from the truth,” he said.
If interest rates were to revert to normal – about 5 percent – bond-fund holders could see losses of 10 to 20 percent in their bond portfolios, Johnson said.
Long- and medium-term bonds are the most susceptible to interest-rate fluctuations, so financial experts recommend a cautious approach.
As the economies of the United States and Europe continue to stumble through tough times, Johnson said he has his eye on new “frontier markets” such as those in Africa and the Middle East for sources of major growth in the coming years.
Growth prospects in those countries are better than those in the United States, Western Europe and Japan, he said.
A lot of factors decide an individual’s ideal portfolio balance, including age, risk tolerance and financial situation.
With bond prices so low, investors right now should think about putting more of their money in stocks to keep up with inflation, Lemon said. But if they do that, investors should be prepared to see volatility in their portfolio, he said.
Johnson also suggested people consider investing in alternatives to the traditional mix of stocks and bonds – areas such as real estate, commodities and private equity.
As people consider whether and how to invest in the coming year, Steve Pease, a certified financial planner with Oxford Asset Management, emphasized that with interest rates expected to continue at low levels, investing is the only way people will be able to save enough for the retirement they want.
Banks are paying low (interest), and that will continue in the immediate future, he said.
Before they jump into investing, people need to create a savings and investment plan and educate themselves, which may mean meeting with a financial adviser.
“But the other piece is you’ve got to get in the game,” he said.