The world of investments is complicated and convoluted. Everyday advisors are faced with the challenges of selecting critical investments that are driven by life choices of their clients. As we enter 2015, we wanted to explore some of the unique challenges that we think will be brought on by the upcoming investment year. No one can predict the future – but here’s our assessment of what you can anticipate in 2015.
Any rate hikes won’t change the market drastically
While there have been discussions around a rate hike, it’s unlikely that this will be significant enough to create any meaningful change in market and investment demand. While interest rates remain between 0 to 0.25%, raising them to 1.00% would be impactful but unlikely to change investor appetite, particularly in the medium– to long–term time horizon.
Risk–Free is a misnomer
In conjunction with the continuation of depressed rates in the markets, it’s critical to realize that returns are even more relative, displaying little correlation to the risk-free rate. Nations are continuing to show their imperfections and cracks, mimicking the volatility of a corporate entity driven by the inefficiencies of a public institution, and making it difficult to react to or prevent drastic changes in the economic and financial system. Safe havens will likely decrease and blur the differentiation between passive vs. active investing; the search for absolute safety needs to end and the calculation of relative safety needs to increase.
Market volatility driven by continuing global economic difficulties
Go bull, go home has been the recent trend in the market. With no end in sight for the ever increasing equities market, it’s concerning to see that no one really wants to discuss the elephant in the room when the select few are making a lot of money. Where is the value being generated? There’s been an over bullish appetite in the market and no real rationale for it, particularly in Europe or Northeast Asia – consider the slowing of the Chinese economy. What this may mean is an anticipated change in appetite not too far in the future as we start realizing that up is not necessarily the best way forward.
Increasing focus on international markets
Globalization was a big buzzword back in the day. In a world that’s driven so heavily by the interconnectivity provided by technology and wealth generated through the lowering of barriers in information asymmetry, it’s more real now than ever. Investors will have to have a keen focus on what’s happening elsewhere in the world even if their own portfolios are primarily domestically focused.
A big shift to alternative investments
Alternative investments were for a long time considered a complex and dangerous investment only appropriate for the most sophisticated investors with a massive asset base and a decreased need for liquidity. Increasingly, investors are realizing the diversification benefit of an asset class with decreased volatility and lower market correlations. Liquidity is important but only appropriate for a certain portion of the total portfolio.
Creating the ideal portfolio requires not only the expertise of guidance and advisory, but also a strong knowledge of all markets (domestic vs. international, traditional vs. alternatives) as the focus shifts from a singular metric of alpha to a much more macro perspective driven by the diverse markets and products available to advisors.
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