Wednesday, 19 December 2018

Whether the stock market continues its volatility, trade disagreements get resolved or global economic growth increases, a solid financial plan can help provide the necessary ballast to allow you to pivot and pursue new opportunities in 2019.

While many economic experts predict an exciting year for the U.S. with economic growth, wage increases and continued low unemployment, there are headwinds to watch that investors should be prepared to face.

"No matter whether rates rise and what market cycle we're in, it's essential to have a long-term retirement plan in place that matches your time horizon and risk tolerance," says Scott Zindler, a senior vice president and financial consultant with BBVA Investments. "If you're not comfortable with volatility, you may need to redesign your portfolio and rethink your allocations."

Four matters for investors to consider 

Change brings both opportunities and the possible need to tweak your financial plan. Here are four considerations to address in the coming year:

1. GDP growth and the stock market

The Federal Reserve's projection for GDP growth in 2019 of 2.55 percent is a little lower than recent quarters. "One of the biggest headwinds for both global and domestic growth is trade relations with China, the second largest economy in the world behind the U.S.," says Dan Davidson, a senior vice president and chief investment strategist with BBVA Global Wealth. "If trade issues can be resolved, that would remove the angst that has been a drag on growth expectations for both countries."

"Resolution on trade issues would also set up the stock market to potentially do well in 2019," says Davidson.

"Valuations are fairly normal now after recent sell-offs, so there's an upside if this issue could be resolved and if we can get clarity that the end of the Fed rate hikes is near at hand," he says.

"For young people, time in the market matters more than timing the market," says Davidson. "For investors," he says, "it's better to suffer a little volatility than to try to time a sale perfectly and then time a purchase right again when you want to get back into the market."

2. Interest rates anticipated to rise

The Federal Reserve is expected to increase the Fed Fund rates as much as two or three times in 2019, depending on several economic indicators. "For investors approaching retirement who don't have time to recover from any market pull-back," Zindler says, "this could be the time to reduce your risk exposure and increase your allocation to cash accounts as they become available at a higher interest rate."

"If you have debt," says Andrew Miller, a vice president and senior financial planner with BBVA Global Wealth, "it's important to be cognizant of how it's structured and decide whether it's time to refinance or pay off debt before rates move higher."

"For corporations, higher interest rates and widening credit spreads could be destructive to their balance sheets,” says Davidson. "Over these years in a low-rate environment, even marginal companies could get by from borrowing. Now we'll be focusing on companies that are self-funding or don't need to borrow as much."

3. Home values to increase more slowly while mortgage rates rise

Home prices are anticipated to rise by 4.8 percent in 2019, according to CoreLogic, a data analysis firm. "If you're a first-time buyer, you should strongly consider working with a financial planner and a lender to determine what fits your budget," says Miller. “A more seasoned individual can review their housing choice in the context of their overall expenses and taxes and decide if it makes sense to own or rent."

4. Possible recession in 2020

Growth is anticipated to slow in 2020, but good companies are well-prepared for the possibility. “Earnings are still strong,” says Davidson, “so we may not be as late in the economic cycle as some believe.”

"However, oil prices are a concern because the decline in prices could indicate a global economic slowdown," says Davidson. "We may finally see a rotation in the equity market back to value stocks over growth stocks as leverage becomes more problematic for high growth companies."

Regardless of the prognosis for 2019, Davidson encourages investors to take advantage of diversification when possible. "Diversification can protect a portfolio from unsystematic risk — risk specific to a company or industry," says Davidson.

Diversification also offers investors an opportunity to have at least some exposure to the best performing security or asset class. As an example, very wealthy investors rely on the concept of diversification when investing in private equity opportunities where the investor knows they may lose everything they invest on some ventures. However, one or two will be a raging success and more than compensate for the losses elsewhere. No matter what your financial plans are for 2019, it's important to pay close attention to both short-term and long-term outlooks when making financial decisions.

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