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Worcester Business Journal www.wbjournal.com 2015 Economic Forecast 29 e d u c at i o n B EARISH 1. Cash: a likelihood of losing money safely With current low interest rates on CDs and money market accounts there is no way to outpace current inflation rates. Cash can help avoid market volatility but the low rates of return create purchasing power risk. There are other options. CDs are FDIC insured and offer a fixed rate of return if held to maturity. → Only use cash where suitable, but keep the mindset of putting some money into investments NOT correlated, or said another way, affected by the losses of the stock market. SLIGHTLy BEARISH 2. Fixed Income: prepare to be nimble Rates will likely only slightly increase in the next 12-18 months. Corporate bonds offer coupon returns but little appreciation opportunity. The emerging- market debt landscape is improving. Muni and Government bonds offer little opportunity beyond their coupon payment and have rising interest rate risk. Emerging market investing involves special risks and may not be suitable for all investors. Government bonds are guaranteed by the US government as to the timely payment of principal and interest. → Consider underweighting fixed income, Government bonds not likely to outpace inflation. Consider swapping interest rate risk for credit risk in this low default environment. Opportunity for private debt. NEUTRAL 3. U.S. Equity: markets at a crossroad Slightly Optimistic that stock market returns will continue to improve. Stocks are not cheap right now. The overall average price-to-earnings ratio is higher than historical averages, but not so high that it would trigger a major correction. We should not see a sharp decline in returns in 2015. The U.S. expansion remains intact and most rallies have survived rising rates. Valuations are a potential concern and historically Large Caps tend to lead later in recoveries, which is where we are now. The prices of small cap stocks are generally more volatile than large cap stocks. → Consider maintaining an overweight to U.S. equities within a global portfolio. Overweight large-cap stocks over small caps. SLIGHTLy BULLISH 4. International Equity: the shift overseas continues Developed economies are not in sync; European earnings may have room to grow. Given this, emerging- market fundamentals are stabilizing, this is further supported by the fact that institutional investors are looking overseas. International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. → Consider slightly increasing international equities within a global portfolio. Consider strategies that pursue opportunities in developed markets, particularly Europe. For investors seeking more risk, consider emerging markets. BULLISH 5. Alternative Investments: vital to pursuing increased returns and lowering risk Private Equity will continue to be a viable asset class along with currencies and foreign exchange. Due to low credit risk we should continue to experience great opportunities and attractive yields in private debt. Additionally, Real Estate should continue its recovery. A strong dollar policy will continue to hurt commodities. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor's portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. → Consider a shift of some of your portfolio from stocks to alternative investments to potentially lower stock market risk while increasing return opportunities. The Bottom Line: Use Stocks, Bonds, and Alternative Investments for True Diversification Most investors use some combination of stocks, bonds and cash. The global economy has changed and the traditional approach of a portfolio of 60/40 stocks to bond ratio does not work in 2015. Alternative investments have been used successfully by endowments for years, 1 they are less correlated with traditional investments. This means they may perform differently from each other under the same market conditions and can provide further diversification, 2 lower portfolio volatility, and potentially increase returns. For the math behind why alternative investments are a viable option for most investors, see the opposite page. n Economic Forecast for Personal Investing Factors and Moves to Consider: Roadmap to Investing in 2015 1 Source: From 6/30/2002-6/30/2012, an equal-weighted average of 506 University Endowments returned 6.2% compared to the S&P 500® Index average return of 5.3%. 2012 NACUBO Endowment Study, Annual Report of the National Association of College and University Business Officers of Endowment Performance and Management in Higher Education, 2013. The S&P 500 Index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. 2 Diversification does not assure a profit or protect against loss in a declining market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Stock investing involves risk includ- ing loss of principal. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is histori- cal and is no guarantee of future results. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful or protect again loss. Investing involves risk including loss of principal. Securities offered through LPL Financial member FINRA/SIPC. Advisory Services offered through Provo Wealth Management Group a Registered Investment Advisor. Provo Financial Services, Inc. and Provo Wealth Management Group are separate entities from LPL Financial. Christopher P. Provo, RFC, CRPC President/CEO Provo Financial Services, Inc. S P O N S O R E D B y

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