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Worcester Business Journal • www.wbjournal.com • 2017 Economic Forecast 29 E D U C AT I O N S P O N S O R E D B Y I t should not come as a great surprise to anyone that 2017 will likely be filled with volatility. The Mastery comes when one knows how and when to turn volatility into opportunity. CASH In our opinion, the statement "Cash is king" has probably never been more appropriate for 2017 than perhaps any year we have observed since 2008. U.S. Stock Markets are overvalued by 20% or more and economic conditions have many investors nervous. Tactical investing is key to turn cash from "safe haven" to opportunity play. If we experience a 10%-15% correction like we did in 2015 and 2016 seizing that opportunity would be wise. Over the past 25 years I have heard many prophesize a "doomsday scenario," although 2008 was the scariest by far since the Great Depression of the 1930's it's unlikely to occur given the resilient US economy has in the past brought 0pportunity. -->Consider only using 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. You should note that cash alternatives do still carry various risks, such as market or credit risk, and may lose value. BONDS Interest rates should increase but without signs of major inflation and or growth; any increases should be modest. Rate increases are always short term sell offs in this space but over a multi year period bonds settle down for those looking for greater income than cash. We like corporate credit risk debt over interest rate sensitive debt like Government Bonds. Defaults have been lower recently with corporations managing debt effectively. Senior secured debt has historically offered less default risk than mezzanine or junior subordinate debt. Don't get greedy with the high yield. -->Consider underweighting fixed income, Government bonds not likely to outpace inflation. Consider swapping interest rate risk for credit risk in this low default environment. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values vary, and will decline as interest rates rise. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. High yield/junk bonds (grade BB or below) are not investment grade securities, and have higher risks than those graded BBB and above. US STOCKS Valuations are expensive, but it doesn't mean that stocks can't continue to climb. Former Federal Reserve Chairman, Alan Greenspan, in December of 1996, made his infamous comment, about "irrational exuberance," and yet markets doubled in the next three years. If one had invested on that day, the bottom of the 2002 market correction would have resulted in no loss scenario. Naturally funds would have doubled prior to the 2008 correction before once again netting out at zero. In the past 8 years markets have shot up approximately 200%. What does that tell us? Maybe it's a good time to take some profits and diversify accordingly. I tell my team that when 5 year returns are negative, it may be a time to buy. What do you do when those same investments with 5 year returns have a very high double digit returns? You should consider selling, take some profits and bank in cash. A pull back is logical but may not happen. Give yourself permission not to be fully invested if markets continue to roll. -->Consider maintaining an overweight to U.S. equities within a global portfolio. Overweight large-cap stocks over small caps. As with all investing, stocks investing has risk including loss of principal, and the prices of small cap stocks are generally more volatile than large cap stocks. INTERNATIONAL STOCKS Valuations are much cheaper than the U.S. Stimulus abroad is getting ramped up in much the same way we did many years ago. If you're absolutely busting to stay in equities 2017 may present the first year international stocks outperform U.S. Stocks. The risk is theoretically less from a valuation methodology. For those looking for potentially higher returns and willing to take on risk, you should seriously consider emerging markets. In our humble opinion, active management may be prudent to consider, especially in emerging markets. -->Consider slightly increasing international equities within a global portfolio. Consider strategies that pursue opportunities in developed markets. For investors seeking greater returns, who can absorb greater risk, consider emerging markets. When investing internationally, it's important to remember there are special risks such as currency fluctuation and political instability, which may not be suitable for all investors. These risks are often heightened for investments in emerging markets. ALTERNATIVE INVESTMENTS Defined as any investment that is not a stock or bond. This consists of investments like Real Estate, Commodities and Currencies, etc...We believe this asset class is critical going forward. Some investments are designed for income and others growth. Research should be conducted to discover which is appropriate for you. Some investments may not be suitable. Make sure you work with an investment fiduciary to try and uncover any potentially hidden gems. -->Consider a shift of some of your portfolio from stocks to alternative investments to potentially lower stock market risk while increasing return opportunities. You'll also want to consider special risks with alternative investments, such as leveraging the investment, potential adverse market forces, regulatory changes, potentially illiquidity, and that strategies could accelerate the velocity of potential losses. 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 and other factors have changed and the traditional approach of a portfolio of 60/40 stocks to bonds ratio, in place since the inception of the Modern Portfolio Theory of 1952 is outdated. This leaves many scratching their heads and wondering why what's worked before doesn't hold true in 2017. Alternative Investments have been used successfully by endowments for years1, 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, lower portfolio volatility, and potentially increase returns. Lowering risk is a more critical factor in 2017, having to fight your way back from losses can be a real portfolio killer. Work with an advisor with cutting edge analytical tools to turn volatility into opportunity, a critical move in 2017, impacting your portfolio for the short and long term. n Economic Forecast For Investing Factors and moves to consider: Roadmap to investing in 2017 1Source: 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 Endowment Performance and Management in Higher Education, 2013. e S&P 500 Index is unman- aged and available for direct investment. Past performance is no guarantee of future results. Allocations for endowment funds, may not be suitable for the average retail investor considering various factors, such as volume of invested funds and respective risk tolerances. Additionally, the performance shown may not be indicative of any results of a retail investor. Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice 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.