Andrew Menachem: Investment ideas for the winter season


Special to The Miami Herald

As we move into the winter holidays, it’s important to remember that investments have “seasons” as well. Just as fall, winter, spring and summer follow each other, investments move in a cycle that includes both upturns and downturns. That’s one of the reasons to build a diversified portfolio of assets that don’t follow the exact same cycle.

Successful investors also tend to look ahead rather than back when developing a game plan for the coming year. That’s because an asset class that delivered strong returns in the past few years may or may not do as well in the future.

With that thought in mind, here are some investment ideas to consider for your portfolio in 2014.

During an economic downturn, the nation’s largest public companies tend to outperform smaller ones. Investors lean towards buying shares in blue-chip stocks that can “ride out the storm.” But as a recovery moves along, small-cap and mid-cap companies may outperform large-cap stocks. A well-managed small to mid-size company may be able to take advantage of the growth opportunities that emerge in a stronger economy. Since there are no signs of an economic slowdown at this point, you may want to consider increasing your allocation to mid-cap and small-cap stocks in the coming months.

Turning to bonds, the recent cycle of over-performance by fixed-income securities may be drawing to a close. Although the Federal Reserve intends to continue its purchases of fixed-income bonds to support the economic recovery, interest rates are likely to move higher in 2014.

One way to potentially reduce exposure to interest rate risk is to shorten the duration of your bond portfolio. In other words, rather than purchase 30-year bonds, look for bonds that have shorter maturity ranges. As an inflation hedge, a possible solution is to consider TIPS (Treasury inflation protected securities) whose rates automatically adjust to reflect changes in the nation’s Consumer Price Index (CPI).

While alternative asset classes, such as hedge funds, infrastructure funds and master limited partnerships (MLPs) have less liquidity than stocks and bonds, they can diversify your portfolio and provide different benefits. For instance, infrastructure investments in projects like utility plants and toll roads can provide a steady flow of cash with some built-in projection against future inflation.

There are also plenty of investment opportunities beyond the United States in both developed and emerging markets. For instance, the Japanese economy — which has sputtered along for the past two decades — may finally be entering a growth phase under Prime Minister Shinzo Abe. A combination of fiscal stimulus and political reforms may help Japan’s public companies play a stronger role in world markets, with an accompanying rise in values.

For the past few years, European stocks have also been out of favor, and are now relatively “cheap” in comparison with U.S. equities. Since one of the traditional approaches to building wealth in the financial market is to buy low and sell high, you may want to consider increasing your portfolio allocation to European stocks, especially if you have a long-term investment horizon.

You may also want to look at equities in emerging markets like Brazil, India and Mexico, as well as smaller nations like Peru, Vietnam and Saudi Arabia. Many of these countries have enjoyed growing economies in recent years, despite the recession. Emerging market investing does have added risks, such as currency fluctuations and political factors, but when added to a diversified portfolio of stocks and bonds it can actually lower the overall risk (volatility) of your portfolio. The reason for this is that emerging markets and U.S. markets don’t necessarily move in tandem with one another.

Finally, review your current portfolio and do any necessary rebalancing to be sure it reflects your overall investment strategy. For example, if your investment plan calls for 30 percent stocks, you might see that those equities have grown in value in recent months and now make up a much larger percentage of your portfolio. Therefore, you may want to sell some of your equities and redeploy those funds into an underperforming asset class.

Diversification doesn’t guarantee a profit or protect against loss, but it does reduce your vulnerability to large fluctuations in your portfolio. That’s the key to maintaining a solid portfolio throughout every season of the year.

Andrew Menachem, CIMA, is a Wealth Advisor at the Menachem Wealth Management Group at Morgan Stanley in Aventura and teaches at the University of Miami. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors.

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