Wealth Management Guide 2014

It may be difficult to top the high stock market returns of 2013, but local experts are hopeful the market will perform relatively well this year. They are also warning investors not to get greedy.

“With five straight years of great returns, it’s been so good for so long that now is not the time to be greedy,” says Kevin Whelan, a chartered financial analyst and portfolio manager at Opus Capital Management.

“This market has set every record. A market can’t go up forever,” Whelan says. The widely watched Dow Jones Industrial Average closed 2013 at a record 16,576.66, up 26.5 percent for the year.

While no one can predict what the stock market will do in 2014, experts agree that if it dips, then investors should be ready to take advantage and buy at a discount.

Local investment experts share the same broad picture of the economy this year. They anticipate slow, steady growth, interest rates that stay relatively low, an improving unemployment rate and modest stock market returns. No one interviewed anticipates the 25 percent-plus returns of 2013.

However, Americans are feeling wealthier after last year’s fattening of retirement accounts and investment portfolios, so this could be a good year for consumer spending.

“We call it the wealth effect. People look at their 401k, they see it growing, that improves their confidence so they go out and spend money,” says Scott Keller, a CFA and principal at Truepoint, Inc.

Many investment experts see pent-up demand from consumers for housing and cars after the lean recession years. They also recognize that many U.S. companies are in good shape financially, with a lot of cash on hand, and predict a buying spree, especially for technology.

Jason Jackman, president of Johnson Investment Counsel, Inc., predicts stock market returns in the mid-single digit range in 2014. But he can’t rule out another banner year, because, “admittedly, we weren’t expecting that last year,” he says with a laugh.

He was surprised that the market did so well last year, in spite of obstacles such as the federal government shutdown, higher payroll taxes, the national debt ceiling crisis, and the sequestration and budget cliff debate.

“We expect less government drag this year and self-inflicted crises, and less policy headwinds,” Jackman says.

Because he doesn’t foresee any big policy showdowns or new tax increases, he expects the economy to grow at a rate of 2.5 to 3 percent in 2014, which is better than the 1.7 growth rate in 2013.

“Unemployment has been reduced. There’s growth in the economy and that’s reflected in consumer spending,” says Terry Kelley, a CFA and principal at Bartlett & Co.

Kelley is positive on stocks, but he isn’t exuberant. “We don’t necessarily feel as robust as last year,” he says.

Keller agrees.

“We’re not terribly afraid of anything that could kick us into another economic spiral,” Keller says. But he warns investors to keep a close eye on the stock market.

“We’re probably somewhat overdue for some kind of correction,” he says. “We embrace the market roll. We recognize it as an opportunity to buy stocks on sale.”

While Keller doesn’t make heavy bets on one sector or country, he does see some areas of growth this year. He sees investments in funds that hold foreign emerging markets—nations in the process of rapid growth such as Brazil or China—as attractive, perhaps risky in the short term, but a valuable deal in the long run.

While Keller and others see emerging markets as good values, despite their volatility, some advisors prefer what they consider a safer investment in internationally developed markets, such as Europe, as it emerges from its recession.

In this potential growth year, Keller has a “slight tilt” in favor of small cap value funds. These mutual funds primarily hold stocks in smaller companies that are thought to be undervalued in price, with the potential to grow into big companies.

There are several key areas of U.S. growth that local experts predict in 2014: the energy sector, automobiles, general manufacturing, industrials and technology.

“We like technology companies. They benefit when manufacturing rebounds because companies start to invest in themselves,” Jackman says.

Kelley agrees. “Companies will begin to spend and technology is something they tend to want to spend money on because it adds to productivity,” he says.

Jackman also favors master limited partnerships that are linked to energy infrastructure, such as pipelines that transport natural gas and oil.

Many local experts are pulling back from long-term bonds, because they believe that interest rates will likely rise in the next few years.

“Very few people would argue that rates won’t be going up. So we want to see investment in short-term bonds, with maturity of less than five years,” Keller says.

While experts have their own guesses and predictions, they all agree on one piece of advice—everyone should take a hard look at their overall portfolio at least once a year.

“If you look at the overall picture, it allows you to locate assets in a more efficient manner,” Keller says.

For example, bonds and real estate investments that produce a lot of income should be sheltered in tax-deferred retirement accounts, while more tax-efficient assets, such as stocks, are placed in taxable accounts, he says.

Experts also recommend minimizing capital gains taxes by keeping track of capital losses and using them to offset future gains. Investors can carry forward losses several years in order to reduce tax liabilities on future capital gains.

They also urge clients to maximize contributions to 401k accounts, and rebalance their portfolio as their lives change and their tolerance for risk shifts.

“If we’ve learned anything over the past five years, it is that the really successful investors have a plan, and they stick to that plan,” Kelley says.