The bulls are screaming, and during the past week we’ve seen the S&P 500 Index surge to its highest point in more than five years. In fact, the last time the broad measure of the domestic equity market was at this elevated level was back in 2008. Of course, we all know what a great year that was for stocks, don’t we?
I am being tongue in cheek here, of course, as 2008 actually was one of the worst years ever for equities. Now, I am not saying that 2013 will be a repeat of 2008. But in 2008, as is the case today, investors were largely of the opinion that nothing possibly could go wrong, and that stocks were headed up, up, up.
I remember that time as a period of high complacency, and one characterized by blind optimism about the markets, the global economy, the housing market, etc. The result of this optimism was that investors failed to protect themselves from a pernicious fall in stocks. Moreover, many investors were way too allocated to momentum stocks. Because of that, many investors have yet to begin to get back to where they were in 2008.
Unfortunately, the same sentiment back in 2008 is out there today.
According to a recent Bloomberg survey, investors are the most bullish on stocks in at least 3 1/2 years, with close to two-thirds planning to raise their holdings of equities during the next six months.
The Bloomberg Global Poll also showed that 53% of respondents say equities will offer the highest return in the next year. That figure represents a 17 percentage point jump from the last poll in November. It’s also the highest metric since Bloomberg began the quarterly survey of investors, analysts and traders in July 2009.
So, what’s behind all of the enthusiasm for stocks? The survey cites growing confidence in the U.S. economy and a reduction in concern over Europe’s ailing financial situation. According to respondents, America is in its best shape it’s been in for two years, and Europe has essentially righted its 2012 tailspin.
All of this optimism translates into a serious case of complacence, and one that I fear really could hurt those who are not prepared to cope with a market downturn.
It is during times when investors harbor unbridled bullish enthusiasm that, seemingly out of nowhere, an exogenous event pops up to slap investors back into recognizing the error of their ways.
So, what kind of exogenous events can take this market down?
Certainly there are the political machinations in Washington about spending cuts, and particularly over the debt ceiling. Earlier today, the House of Representatives voted to extend the debt-ceiling limit for three months, provided the Senate passes a budget. We’ll see what happens here. But to me, this situation seems like more of the same “kicking the can down the road” that has led us to so many uncomfortable, and market damaging, political battles.
Then there’s the unknown still lurking over Europe, and that region’s troublesome bailout issues. If we get more tumult in that region in the months ahead, it could very well be another flight-to-safety event in the market similar to what we saw in mid-year 2012.
For now, however, the market continues to trade with blinders on, and that situation means stocks keep getting bid up -- until they don’t.
Fiscally Fit for the New Year, Part III
For the past couple of weeks, we’ve outlined some of the steps needed to become fiscally fit in 2013. This week, we have Part III of our series, which will be of particular interest to investors with a focus on income. Recall that the first installment was all about taking an inventory of all of your assets. Part II was to do an asset allocation review. Today in Part III, it’s time to think about cash flow.
In my experience, most people don’t think about their income as much as they do their expenses; however, the beginning of a new year is a great time to look at all of your existing -- and potential -- income streams. Now, this exercise is extremely important if you’re in retirement or transitioning into retirement, but it’s also very important if you’re still working.
Remember that your goal when investing is to increase your net worth. You can boost your net worth by making good investment decisions, but you also can accomplish this goal by saving more money. The bottom line here is income minus expenses. We will get to the expenses portion of this equation next week, but this week’s focus is on income.
Income is something that can, and should, come from multiple sources. When you finally reach retirement, you’ll want multiple income streams. Here are the categories of income for most people who are currently working:
W-2 income (wages earned and taxes withheld)
Investment income (interest and dividends from your taxable portfolio)
Royalty income (alternative income funds such as master limited partnerships, real estate investment trusts, etc.)
Business ownership (profits from a small business or side business)
For retirees, the categories for income streams also include:
IRAs (required minimum distributions or withdrawals from retirement accounts)
Other retirement plan distributions
This week, I want you to calculate all of your current (and projected) income, and figure out what’s coming in monthly and annually. Your goal here is to add up your total income, as you want to know how much cash flow you’re expecting this year. Completing this exercise is critical to determining the kind of net income you’re going to have in 2013. Knowing what you have coming in is the first step in increasing your net worth, so be sure to complete this exercise before next week.
In keeping with our sector theme for the previous two ETF Talks, the exchange-traded fund (ETF) that we are featuring today focuses on a sector that typically offers slow and steady growth. Today’s featured sector is healthcare. As long as there are people, healthcare will be needed to treat their illnesses, diseases and discomforts. As a result, the health-care sector profits from this ever-present reality. The Health Care Select Sector SPDR (XLV) covers a wide range of companies investing in various segments of the health-care industry.
This fund seeks investment results that, before expenses, correspond generally to the price and yield of companies in the Health Care Select Sector Index. That index includes companies from the pharmaceuticals, health-care equipment and supplies, health-care providers and services, biotechnology, life sciences tools and services and health-care technology industries.
Already up 3.98% in just the first few weeks of the year, XLV’s January growth follows a healthy 13.62% jump during 2012. The fund also offers a yield of 2.01%. Look for this fund to continue its steady growth, no matter what decisions are made in the nation’s capital. Indeed, ObamaCare should keep money flowing into healthcare one way or another.
Almost all of XLV’s holdings, 98.32%, are in the health-care sector, which is to be expected from a health-care ETF. The remaining 1.68% of the fund is invested in the technology sector. XLV also is rather heavily invested in its top 10 holdings, with 59.84% of its total assets residing there. Its top two holdings, Johnson & Johnson Common Stock and Pfizer, Inc. Common Stock, account for 12.64% and 12.01%, respectively. The remaining members of XLV’s top five are Merck & Company, Inc. Common Stock, 8.10%; Abbott Laboratories Common Stock, 5.71%; and Amgen Inc., 4.31%.
With most of its holdings in a sector largely independent of the inevitable and impending Washingtonian scuffles, and with ObamaCare likely to help certain industry companies, look for XLV and its ilk to produce profitable returns for the foreseeable future.
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.
Opportunities and Risks for Investors in 2013
Do you know about the tremendous opportunities in the right market sectors in 2013?
Do you know how to avoid the pernicious risks populating the markets in 2013?
This teleconference, aptly titled "Opportunities and Risks for Investors in 2013," will give you our latest outlook on the equity markets as we embark on another year of uncertainty and unknowns.
During this one-hour interactive presentation, we discussed how to position your portfolio to protect your principal, generate the income you need and achieve your growth objectives.
In 2013, we're expecting an increase in market volatility, and that situation is likely to provide outstanding opportunities for investors -- but only if they are properly prepared.
Here are just some of the topics we covered during the teleconference:
The impact of new, higher taxes on the U.S. economy from the fiscal cliff deal.
What to expect from the looming battle over spending cuts and the debt ceiling.
What strategies you can put in place now to shelter and protect your money from the decisions made in Washington.
The best opportunities for income investors if interest rates rise in 2013.
The best opportunities for growth in light of a slowing U.S. economy and the continued recession in Europe.
Plus much, much more…
As with all of our teleconference events, it's our objective to help you make good decisions about your portfolios. Now more than ever, making sound decisions with your money is the key to achieving success. Let us help you do that in 2013 -- and the first step is our upcoming Fabian Wealth Strategies teleconference.
To listen to this presentation, simply click here.
NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.
Excellence is a Habit
“We are what we repeatedly do. Excellence, then, is not an act, but a habit.”
Arguably the greatest of all philosophers, Aristotle also was one of the first motivational gurus. In the quote here, he extols the virtue of excellence, and the necessity of making such behavior part of one’s action. I think this lesson in wisdom is one that behooves all of us to learn.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.