Investing in 2018: Five Ideas for the Second Half

Chris Haverland, CFA, Global Asset Allocation Strategist at Wells Fargo

As we enter the second half of the year, we see many catalysts that could impact market performance. Given that backdrop, here are five ideas investors can consider to better position investment portfolios for the remainder of 2018:

1. Stay invested—Cash and cash alternatives have a place in an investment portfolio for rebalancing, tactical opportunities, and transaction costs. Yet, in our view, the amount should be kept at a minimum as returns for this asset class historically have outpaced inflation only slightly (and, more recently, have lost ground to inflation). We recommend dollar-cost averaging1 any excess cash into a diversified mix of assets.


2. Don’t abandon fixed income—Even in this rising-rate environment, we believe that bonds should be included in a diversified portfolio. They can provide income, stability of principal, and low correlation to equities. We recommend keeping quality high and duration low2 —which aligns with our favorable view of short-term fixed income. We also see an opportunity in U.S.-dollar-denominated emerging market debt as valuations and yields have become relatively attractive.


3. Diversify equity holdings—U.S. equity markets have outperformed their international counterparts this year. Yet, that could change as asset class leadership often varies from year to year and cycle to cycle. The growth of international economies has slowed lately. Along with trade concerns, that slowing growth has pressured equity prices, but valuations are becoming increasingly attractive. We continue to favor U.S. equities over international equities, but our neutral rating on international equities suggests that investors should be at or near their strategic asset allocation targets.


4. Consider alternative investments—With expectations for higher volatility and modest returns in many traditional asset classes through year-end, hedge funds may provide a productive alternative for qualified persons. Hedge funds may generate positive returns if, as we expect, individual stock correlations fall and the environment for active management improves. We continue to favor Relative Value and Equity Hedge strategies, especially as bond and equity market volatility persists.


5. Stick to your plan—Concerning headlines are ever-present, and unexpected events routinely impact the markets. These often are temporary in duration and typically have no influence on long-term financial goals and risk tolerance. Therefore, developing a strategic investment plan that looks beyond short-term disruptions (and includes periodically rebalancing back to plan target allocations) can be very helpful in seeking to achieve long-term financial goals.

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