A five-point strategy for riding the bull
CHICAGO (Reuters) - With the U.S. stock market rallying this year, it may be enticing to take extra cash on hand and ride the bull.
If anything, it is all too easy to pour contributions into actively managed U.S. large-stock funds. Some 90 percent of all retirement plans surveyed last year by the Plan Sponsor Council of America, an employer group, offered actively managed domestic stock funds, and most IRAs and 401(k)s hold these funds.
But a stock fund may not track the market as closely as an index fund. And there are several other asset classes that are worth scrutinizing. If you are jumping into the market with a bit of cash that goes beyond what you already have set up - say, $10,000 out of savings - it would make sense to cover a broad range of global options instead of exclusively focusing on U.S. large-company stocks.
What kinds of funds should you consider if you are a moderate-risk individual already invested in large U.S. stocks? Here are some often-ignored alternatives:
1. A broad sampling of U.S. stocks (60 percent).
If you're a U.S.-based investor, you're going to have natural bias toward blue chips in the S&P 500 Index, which has climbed some 9 percent this year, dividends included. But certain industrial sectors have done even better: healthcare is up 16 percent; consumer staples have risen nearly 14 percent, and consumer discretionary stocks are higher by about 11 percent.
If your actively managed fund covers just a slice of the U.S. market, you could be missing future gains. For your extra money, look for a "total market" index fund that includes large, mid-sized and small companies such as the Fidelity Spartan Total Market Index Fund, which is up 12 percent for the year.
2. Developed market stocks (20 percent)
Your backyard is not always the best place to invest. By "backyard," I mean the country you're living in and name-brand companies that are familiar to you. While U.S. stocks are certainly outpacing Chinese and European stocks this year, that is not the case with other countries. Japanese stocks, for one, are showing a robust rebound. The iShares MSCI Japan Index fund, which tracks the Japanese market, is up 11 percent year to date.
A broader choice is the Vanguard Total World Stock Index ETF, which is up about 10 percent for the year. The index fund covers some 98 percent of the word's public market capitalization. So you'd get a piece of most U.S. sectors plus non-U.S. and developed markets, including Japan.
3. Emerging markets stocks (10 percent)
Investors have a tendency to pile into what is hot at the moment and ignore laggards that could offer future appreciation. Emerging markets stocks fit that bill now. Although trailing U.S. stocks, they represent potential economic growth. China, India and Brazil are growing in terms of economic activity and population. As their standards of living rise, their citizens will be buying more consumer goods, food and energy.
The iShares MSCI Emerging Markets Index ETF, which is down 1.5 percent over the past year but offers a good opportunity for growth, focuses on the leading stocks from Asia, South America and other developing regions.
4. Commercial real estate (5 percent)
Companies that buy and hold retail, office, storage, healthcare, industrial and multi-unit residential properties and mortgages are often ignored. In the first quarter, the FTSE NAREIT All-REIT index climbed 9 percent after rising 20 percent last year. Consider global funds that hold real estate investment trusts (REITs).
The SPDR DJ Global Real Estate exchange-traded fund, which is up about 18 percent over the past year, holds real estate investment trusts in developed and emerging markets.
5. Global bonds (5 percent)
Another clear temptation is to keep all of your money in U.S. government or corporate bonds. You may, however, find higher yields in international bond funds. That means investing in bonds from emerging and developed markets. The iShares S&P Citigroup International Treasury ETF holds government bonds from countries across the world. The fund has gained almost 3 percent in the annual period.
By no means is this a complete portfolio by itself. It's meant to supplement what you already own in U.S. stocks and bonds.
To put all this together into one package for an investment in the $10,000 to $100,000 range, you would contact your investment adviser, financial planner or broker and have them properly diversify your portfolio with low-cost index funds or do it yourself using the guidelines above.
You need to ensure that your money is spread out among assets that do not move in lock step and that it follows your financial goals. Even though it is tempting to shift assets to current winners, do not load up on any one category.
At the very least, make sure that you maintain a global perspective, despite the fact that returns are lagging in Asia and Europe. Those areas may offer better stock prices now and could climb when U.S. stock prices sag.
(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)
(Follow us @ReutersMoney or here Editing by Beth Pinsker)
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