Because a savings account just isn’t cutting it.
Accumulating savings is hard enough. Knowing where to invest is even more challenging.
We’ve realized a few things:
- Your money needs to be working for you while you sleep
- Your money is worth 1-3% less each year due to inflation
- It takes due diligence to make a good investment
Factors to focus on
1. Business Cycle – You’ve probably heard of a recession before. There are 3 other stages that are important to consider when it comes to making an investment in a specific geography. These other 3 stages are important because you can make a lot of money when the economy is firing on all cylinders.
- Early – Things are beginning to get better.
- Recovery – Growth is accelerating.
- Expansion- Growth is peaking and slowing but still positive.
- Recession – Growth is negative and declining.
Things you need to know:
GDP: the value of goods and services produced in a country. A recession is defined as two consecutive quarters of declining GDP.
With the business cycle and supporting data in mind, you want to be investing in Europe, Asia, and the US right now.
Look for stock markets where future earnings expectations are positive. Fortunately enough the majority of the global indices have improving earnings growth for the foreseeable future.
Source: Fidelity Investments
There are always risks when it comes to investing. One way to mitigate these risks is through diversifying your portfolio. This means finding high quality investments in different regions that incorporate different styles of investing to ensure that all of your investments are not correlated.
Styles of investing
Value: Finding underpriced companies and waiting for their true value to be recognized (Major retailers due to threat of Amazon).
Growth: Finding companies that are growing faster than the market (Facebook, Amazon, and Google).
Look at the chart below. This illustrates the importance of diversification and why you should have exposure to different markets. An investment that provided the best long term performance might be out of favor leaving you missing out on returns as you can see in the YTD performance of US stocks. Cover all your bases, pay attention to the business cycle, and make sure you’re well diversified from a regional and style perspective.
Europe – EFA
You want exposure to EAFE which is Europe, Australasia, and the Far East. It is younger in the business cycle and is providing a similar level of earnings growth as the US.
US Technology – QQQ
Exposure to the NASDAQ which is predominately comprised of technology, healthcare, and consumer discretionary stocks which is what is driving the market in the US this year.
Emerging Markets – EEM
This ETF will give you exposure to emerging markets. This has been one of the best stock markets YTD and has attractive growth prospects moving forward.
We believe in active management versus passive strategies like ETF’s in certain scenarios. When you are in the middle to late stages of the business cycle you may want to stay away from ETF’s that aren’t active (you don’t want to hold every company in the index). This is where you can find a mutual fund that will pick the right companies that will perform better than the broad market.
We’ve given you some ideas and enough insight to either a) Do your own research and find a suitable investment or b) Contact your Financial Advisor and ask their opinion about some of these discussion points.
If you don’t have the start up capital to make a sizeable investment, we recommend you read this post.
It’s Time to Win Big!