Tuesday, December 19, 2017

Your Quick Guide To Going For Growth In 2018

There’s no doubt about it, this last year has been one of the strangest of all with a new President, unrest in the world and the continuing saga of the UK’s plans to leave the EU.

So now it’s time to start questioning what 2018 holds in store for us and how we can all start to make our hard-earned cash work even harder for us. A good place to start would be to look at what we can say about the way the economy will be headed in 2018, or what we may be able to predict.

The first thing to say would be that already the Federal Reserve has indicated that interest rates may be raised up to four times over the next 12 months. While it’s all but impossible to predict what this will mean in actual terms it is fairly safe to say that, for many, this will place an extra burden on their finances while also making savings rates a little more favourable.

It’s also important to look at exactly why rates may have to rise and the reasons are far from bad. In fact, it’s that the economy is on the up, unemployment’s going down and even globally there are the early stirrings of other countries’ economies coming back to life. So it all adds up to the fact that we’ll be going into 2018 on a strong economic wave.

We also know the stock market will start 2018 at near historic highs as the S&P 500 is currently running a Shiller price-to-earnings ratio of 32, which is nearly double the long-term. average. What this means is that to really maximise your returns and take full advantage of the situation, you’ll have to be extra vigilant about where you invest.

It’s also worth noting that it seems like neither pronouncements from President Trump or the risk of conflict in North Korea have had any effect on the markets over 2017, but that’s not to say that these factors won’t come into play in 2018.

So let’s take a look at some of the investments that could pay off for you over the next year. It’s in no way intended to be definite guidance but it should certainly give you plenty to think about.

Your 401(k) Plan is a great investment - especially for the over 50s

If you thought that tax shelters were only for the super-rich it might be a big surprise for you to learn that you’re sitting on one right now, whatever the level of your wealth, and it’s called the 401(k).

Now you may also have thought that the 401(k) plan is, at best, some far from impressive mutual funds which also have high fees attached to them. But, in fact, it’s a very good and tax-efficient place for your money.

For example, if you currently pay 25% tax then for every dollar you invest it’s an extra 25 cents of your investment that’s compounding, and this, over time, is of huge benefit to you. The fact that next year the IRS is going to increase the annual contribution limit on 401(k) plans to $18,500, excluding employer matching, is good news PLUS if you’re 50 or older, you can add another $6,000 per year making $24,500.

So, even if you’re nervous about where the market may be heading, you really should try to maximize your 401(k) plan, especially as there are money market and stable value funds to invest in with minimal risks.

Consider alternative investments too

While there is plenty to recommend the stock market both as a tried and trusted method of increasing wealth, at least during the good times, as well as being a way to own a stake in the US economy, it’s not necessarily always the very best place to invest.

You only have to look at the 13 years between 1968 to 1981 when the Dow Jones Industrial Average actually lost money when inflation was taken into account. But over the same period commodities and gold did far better, especially in the case of the latter whose value rocketed by 2,000% between 1971 to 1980. So the moral of this story is not just to buy gold to think about diversifying in order to not be just relying on the market.

A word of caution, though. When you’re thinking about investing in alternatives you need to be aware that it’s far less regulated than the stocks and bonds markets so a little more diligence is needed. You should also never invest in something you never fully understand. We only have to look back as far as 2008/9 to see exactly where that can lead.

The Bitcoin bubble?

One example of understanding what you’re getting into before you make the leap is the Bitcoin and other cryptocurrencies.

Throughout the year Bitcoin has been hitting the headlines as its value has gradually increased, finally hitting the symbolic $10,000 mark in November. There are also many stories about the people who got in at the earliest days and now are finding that they are multi-millionaires, on paper at least. But, even in the light of these huge gains in value, there’s also increasing disquiet amongst banks and economists that this is showing all the signs of a classic bubble, and we all know what happens when they burst.

The fact is that Bitcoin’s key strength and point of difference in the eyes of some – its independence from governments and financial institutions – is also its biggest weakness. The facts behind this expressed very succinctly by Rodney Johnson, the head of the highly respected economic forecasting firm Dent Research who has pronounced that “If a company or commodity has no assets, no returns and no backing, what’s it worth? In a word, ‘priceless.’ Some will see zero value, others infinite value”. So it very much depends on how you stand on this point which will dictate your attitude to jumping on the Bitcoin bandwagon.

When asked more precisely about his attitudes to investing in a cryptocurrency Johnson was also quoted as saying. “I wouldn’t risk any significant portion of my wealth on such a thing. But I might put a few dollars in, like buying an investment lottery ticket.”

So, in terms of gambles, you might well be better off trying your luck at any of the many online casinos that offer you the chance to take up free spins and bonuses and play without putting up a single cent of your own money, in a fiat currency, of course!

Go for value stocks

So now we’ve covered off these areas, it’s time to take a look at the sorts of stocks that could prove to be a good investment throughout 2018 and beyond.

There’s a simple reason why we’ve left this to last and that’s because your first priority should always to be making your definite savings decisions first before seeing what cash is left over for more speculative investments.

Assuming you go have a pot to invest, it could well be worth following the advice given by many market observers who have been advising that we should be looking for value rather than growth. Now this may sound counterintuitive at the end of a year in which the Russell 1000 Growth Index outgunned the Russell 1000 Value Index by showing returns of over 100% more but the tide may be beginning to turn. So talk to your financial advisor and keep a close eye on the financial pages to spot the value opportunities as and when they arise.

As to what all of our financial situations will be at this point next year, only time will tell. But what is certain is that we’ll all be a year older - but hopefully also a little wiser and richer too - and ready to take on all of the challenges that 2019 may have in store for us.

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