5 Huge Market Shifts, and How Investors Should Respond: Merrill

Wolfe suggests thinking about high-yield debt and emerging-market bonds while staying cautious about U.S. Treasuries. High-quality stocks with solid dividends, too, remain a cornerstone of many people’s investment strategies.

Meanwhile, Wolfe says, the possibility of renewed inflation could be countered by a greater allocation to real assets—physical things with value, such as real estate, precious metals and commodities—when suitable. Real assets, which also include farmland, timberland and commercial real estate, could provide a hedge against inflation because their values tend to rise in step with consumer prices.

Investors can gain exposure to real assets indirectly, through shares of agricultural companies, ETFs that track commodities indexes, and real estate investment trusts (REITs). Also worth considering is an actively managed portfolio of commodities futures. These alternatives are easier to buy and sell than the real assets underlying them, and they require smaller investments than buying actual land or real estate.

Still, for wealthier investors, direct investment brings many potential benefits. Farmland can provide annual income, usually through lease payments from farm operators, while timberland offers another potentially efficient engine for appreciation. In the current real estate market, prices remain very affordable in many parts of the U.S., and financing costs for commercial real estate have stayed relatively low. 3. The impact of higher taxes

The new tax legislation, which became effective Jan. 1, raised the top rate for short-term capital gains and nonqualified dividends to 43.4% (including a new 3.8% Medicare surcharge).

That’s almost twice as high as the top rate of 23.8% on long-term capital gains and qualified dividends. For that reason, tax-planning strategies have become more important than ever for many investors.

This can mean taking a few simple steps. Buying municipal bonds in after-tax accounts, for example, has long been a means of achieving tax efficiency.

Investors can also hold on to investments for more than one year so that they qualify for the much-lower rate applied to long-term capital gains.

When an investment must be sold, the tax liability attributable to both long-and short-term capital gains can be limited or eliminated. That can offset the gains with any losses you may have recognized during the same tax year, or from previous years.

“Diversifying globally means making careful choices,” says Bartels.

On new investments, taxpayers may be able to maximize after-tax returns in two important ways. The first is by seeing to it that a portion of the portfolio is devoted to investments such as municipal bonds and certain structured investments, which are tax-efficient by nature.

The second is to keep taxes in mind in choosing the location of assets, whether they’re in tax-free accounts such as Roth IRAs, tax-deferred accounts such as traditional IRAs, or traditional investment accounts.

In applying both of these criteria to their investments, investors may want, in some cases, to include assets held in trusts. 4. Social impact investing

There has been an upsurge of interest recently in what’s called values-based investing, or VBI. In this approach, investors pursue strategies meant to help people, societies and the environment while also offering competitive returns.

According to a November study by US SIF Foundation, a nonprofit that measures sustainable and responsible investing, VBI accounts for $3.74 trillion of the dollars under professional management in the U.S.—a 38% jump from the organization’s 2007 study. More than half of investors under age 44 cite their values as a highly important factor in their investment selection, according to a recent Bank of America Merrill Lynch survey.

The list of investment vehicles that can give you access to VBI strategies is growing. These investments include the socially responsible mutual funds that have long dominated the segment, along with VBI-oriented ETFs, closed-end funds, private equity funds and venture capital funds.

For wealthier investors, separately managed accounts can offer the opportunity to create a VBI portfolio customized to their specific interests and taking into account their overall holdings.

5. The increasingly global nature of investing

During the financial crisis and its aftermath, U.S. investments were buoyed by the global view of America as a relative safe haven—especially as the European debt crisis unfolded—and by the aggressive actions of the U.S. Federal Reserve.

As a result, U.S. equities outperformed even many fast-growing emerging markets.

But as shifts in global markets accelerate, it makes sense to consider a more global point of view, adding geographical diversity to portfolios at a favorably priced moment.

According to Wolfe, as well as the Investment Management and Guidance group at Merrill Lynch, countries that presently combine relatively low price/earnings ratios and healthy rates of economic growth include Japan and frontier markets—countries that have yet to become emerging markets, such as Vietnam, Indonesia and Thailand.

In looking at international investments, it might make sense to pay attention to global equity indexes that include a variety of stocks and countries.

But, as Bartels notes, “diversifying globally means making careful choices”—for example, in Europe. While much of the continent remains troubled, there has been solid revenue growth from certain large multinational companies that export largely to the U.S. and Asia. At the same time, many of these companies have inexpensive share prices because they’ve been painted by the broad, negative brush of Europe’s recession and debt problems.

While ETFs that track national or regional stock indexes can be a useful way to take advantage of global growth, actively managed funds and separately managed accounts are also able to help investors navigate markets that may not be as familiar to them—particularly frontier markets.

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Read How to Invest Like Yale’s David Swensen on AdvisorOne.