Advisors with nervous clients might be tempted to look for a fancy fix to calm their clients’ fears, but there’s still hope in traditional investments. Money Magazine‘s Carolyn Bigda and Paul J. Lim point out some investing trends that might seem right at first, but could leave investors wishing they’d followed their instincts rather than the crowd.
Some clients may be eager to trade their indexed funds for something with a higher rate of return, or drop their bonds to avoid rising inflation. Fundamental indexes weight stocks based on alternative measures like dividends rather than market value, but these funds can lean towards stocks with low price-to-ratio earnings. And despite rising inflation, bonds will always be an important part of your clients’ portfolios.
Foreign funds and commodities are in vogue now, and for good reason. Both are good for diversification, but Lim and Bigda recommend proceeding with caution. By 2050, the United States is only expected to be 10 percent of the global economy, they say. A foreign allocation of 20 percent to 40 percent is a good mix, but add stocks gradually. Commodities, on the other hand, are good to diversify but have little opportunity for growth. And, clients may already have exposure to commodities as a typical U.S. stock fund may have 25 perent of its assets in energy and natural resources stocks.