If you're an individual investor, chances are you've been sitting out the last few rounds of what has generally become known as a market slugfest.
Just because the financial crisis is over, that doesn't mean the markets have calmed down or that investing has become any easier, which is one reason most individuals have stayed on the sidelines for the past year, preferring to play the market via their 401(k)s, mutual funds and Exchange Traded Funds, or ETFs.
Meanwhile, volatility appears to be here to stay. There's even a volatility index that some hardy souls use to influence their investment decisions. That's a little like betting on where the hurricane is going to hit land. Even if you're right, destruction is sure to follow.
Still, this is the time of year when the giant financial services firms issue their investment predictions for the coming year. Obviously no one knows for sure what's going to happen next year because so many unpredictable variables are at play.
That said, here are some educated guestimates based on research provided by the highest-paid financial analysts in the world. You have to figure that if somebody is willing to pay them six and seven figures a year, they should know what they're talking about.
These investment strategists come from Merrill Lynch, Goldman Sachs, First Eagle Investment Management, and FBR Fund Advisors. Here are their predictions for 2011.
Tip 1. It's safe to get back into the stock market as long as you stay diversified and play the S&P 500, which Merrill Lynch Chief U.S. Equity Strategist David Bianco predicts will reach 1,400. His vision is shared by Merrill Lynch Technical Analyst Mary Ann Bartels who points out that the third year of the presidential cycle is generally the best year, with average returns of 14%. Bianco and Bartels like what are known as the Big International Growth sectors like technology and energy as the most likely outperformers.
Tip 2. Merrill Lynch's Fixed Income Strategist Marty Mauro recommends taking credit risk over duration risk in the taxable bond market. Both municipal and corporate bonds are forecast to post positive returns in the intermediate-term maturity range, but returns from Treasuries could be negative. That means if you're going to buy bonds, buy municipal and corporate bonds and not treasuries. In fact, Merrill Lynch is predicting that municipal bonds could provide some of the strongest fixed income returns in 2011.
Tip 3. As well as U.S. equities are expected to perform, global equity prices should do even better. Merrill Lynch research thinks global equities will be up 15% in 2011. However, Abhay Deshpande, of First Eagle Investment Management says he prefers domestic equities over emerging markets.
Tip 4. When considering individual stocks, Merrill Lynch recommends going large capitalized companies over small with the exception of technology and growth over value. Goldman Sachs says equities remain its preferred asset class for 2011. Goldman analyst Chris Pidcock said investors should be exposed to stocks linked to increasing mining volumes, the recovery in the U.S., domestic consumption and M&A/IPO activity. He adds that markets are moving through the 'growth' phase and the majority of price to earnings contraction has occurred.
Pidcock says he believes returns in 2011 will be mainly dependent on earnings per share growth with some potential for price to earnings expansion emerging late in 2011 and 2012. Goldman's top 10 stock picks for 2011 are Amcor, BHP Billiton, James Hardie, News Corporation, Qantas, Asciano, Computershare, Lend Lease, Onesteel and Woodside. Merrill's preferred big cap stocks for 2011 are Macquarie, Stockland, Asciano, Downer Edi, News Corp and Woodside.
Tip 5. For you brave currency and foreign exchange players, Merrill Lynch strategists believe the dollar will strengthen against the euro and yen. As Europe struggles with persistent sovereign debt issues, Merrill Lynch G-10 Currency Strategist David Woo believes the euro will be the weakest currency in 2011, falling to 1.20 versus the dollar by year end. Woo sees the Japanese yen depreciating very gradually to 88 by year-end. He adds that investors looking for a big appreciation of the Chinese RMB will be disappointed as we expect only a small move over the next 12 months.
Tip 6. Commodity prices are expected to rise, led by oil, copper, and coal. Merrill Lynch Commodity Strategist Francisco Blanch says oil may rise to $100 barrel and he forecasts copper to average $11,250 a metric ton in 2011. He adds that coal faces supply constraints and is heavily geared towards emerging markets growth. Blanch says precious metals will continue to benefit from inflation and sovereign debt fears and gold could reach $1,500 per ounce. In contrast, agricultural commodity prices are more likely to fall in 2011.
Tip 7. Credit cards companies. Dave Ellison of FBR Fund Advisors thinks credit cards are one of the more attractive areas now because the yields on the assets are still very high, meaning you're making credit card loans at 10%, 12%, 15%, 20%. He says that's a lot better than making a mortgage loan at 4%, especially when you have people strategically defaulting on their debts. He says he'd rather get 12% and take his chances on defaults, because he can have a lot more defaults and still make money. He prefers transaction-oriented companies like Capital One, Visa, MasterCard and Discover. Ellison said he's also a fan of credit collectors like Portfolio Recovery Associates. These companies buy loans at very low prices and then work them out. If the economy improves and jobs come back even a little bit, people will be able to make those payments. Another attractive area would be small, well- capitalized banks that can take advantage of consolidation in the financial sector.
Tip 8. Financial companies. Deshpande thinks financial companies that have taken a beating in the past two years are victims of misunderstanding. And Ellison recommends those companies that bought those toxic assets like KKR who can sell those assets for twice what they paid for them. Deshpande says his portfolio is full of wrongly accused and underappreciated financials that suffered what he calls collateral damage. For example, he cites Bank of New York Mellon which he claims is not a bank at all and that 80% of its business is actually non-interest-bearing, fee-based revenue, custodial business, and that kind of asset management. He says only 20% is net interest income, and that's really corporate trust business. It's not even at-risk business. These business lines are packed with underappreciated earnings power. He's talking about potential normalized earnings of $2.80, $2.90 a share, so the stock is trading for less than 10 times earnings.
Tip 9. Just do it. Get back in the game as Jim Kramer of CNBC's Mad Money is so fond of saying. Let's face it, if you want to grow your portfolio or to give yourself a modicum of chance to recover losses to your retirement savings you need to get back into the market and put your money back work. You can start small and then add to it as the year goes on. Slow and steady wins the race. Steadily increase the capital you invest and don't leave money on the table. If your employer offers retirement saving matching such as through a 401(k), take it! That's free money that can greatly increase your post-retirement "income.â€
Tip 10. Become as knowledgeable about your options as possible. Developing a clear strategy are keys to smart investing. It is also often a good idea to speak with a qualified financial planner. Read -- and understand -- the "fine print.â€
It's your money. Make sure you know what you're doing with it and what the risks are. Protecting your hard-earned money is worth a few minutes of reading statements or disclosures, and asking enough questions to know what you're getting into.
That means identifying your risk tolerance and understanding where you are in your lifecycle. A single 20-something with 50 working years ahead of her can tolerate more risk than a 50-something with only 20 more years of work ahead. Where in the spectrum are you? And finally, know what you need. A survey by EBRI found that only 46% of Americans had estimated how much money they would need to retire.
So start with a goal in mind. Think about why you are investing -- to buy a house, to send the kids to college, or for your own retirement. Not only will this help to motivate you, but it should also give you a better sense of how much you need and when you need it. Good luck.