Image via Wikipedia
The following is a guest post from Credit Card Compare.
Diversity has always been an important factor in the success of any financial portfolio. Finding the best assets to fill a portfolio is the quest of every investor. Here are 8 investments worth serious consideration.
Commodities
Predicting the commodity market can be difficult. Commodities like wheat and rice can be severely impacted by unforeseen weather. There are, however two commodities that look very good in 2011.
1. Gold
Gold is at an all time high of $1,415 an ounce. This is mainly due to the last round of quantitative easing the Federal Reserve did. Ben Bernanke, the Federal Reserve Chairman, said the bank would likely increase its stimulus efforts during an interview on “60 Minutes.” This implies that another round of quantitative easing is on the way which would push the gold price even higher.
2. Silver
Independent consultancy firm GFMS is predicting the industrial use of silver will increase by 18% in 2011. Combined with another round of quantitative easing that the Federal Reserve is likely to implement in 2011, silver prices will certainly move further north.
[Kevin] Some call silver the red-headed stepchild of gold, and with its volatility it certainly sometimes seems that way. Gold hitting the $1400s was more reasonable, but I didn’t expect silver to hit nearly $40 an ounce so quickly! Depending on your inclinations this could be a good time to take profit or sit tight if your asset allocation has become out of whack.
Exchange Traded Funds
Exchange Traded Funds (ETF) are a great way to diversify. ETFs are a collection of bonds, commodities or stocks and the price is based on the overall performance of all the assets it covers. Here are two ETF positions that should be in your portfolio.
3. MSCI Emerging Markets Index Fund (NYSE: EEM)
Economic growth is on the rise in emerging markets in Asia and Latin America. There is no indication that it will slow in the foreseeable future so index funds like EEM are great investments in 2011. Another reason to like these index funds is the fact that many of the stocks in emerging markets are trading at a discount which adds to the upside.
4. Russel 2000 Index ETF (NYSE: IWM)
In 2010 small cap stocks outperformed the market. The profit margins for smaller companies are likely to follow along with an improving economy in 2011 which traditionally adds to the small cap performance. This should make 2011 a banner year for the Russel 2000 Index.
[Kevin] You also can’t do too badly by going for a set of Vanguard indexed funds which cover the entire market.
Stock
Generally the rewards can be much higher with shares of stock but so is the risk. A good balanced portfolio will take advantage of stocks to increase the potential returns while using other tools to mitigate the downside. Here are three stocks that are expected to perform very well in 2011.
5. American Express (NYSE: AXP)
One advantage American Express has over other credit card companies is the fact its market is on the higher end. They are seeing a reduction in charge-offs and delinquencies. The implied upside of 14.5% to a targeted price of $50.66 makes this a strong stock to acquire in 2011.
6. Teradyne (NYSE: TER)
Currently TER is very cheap with a price to earnings ratio of 9.2 vs. the industry group ratio of 21.7. Their fourth quarter earning were 3 times the previous years earnings and Goldman Sachs is predicting they will initiate a stock buy back in 2011. All of this makes Teredyne an attractive option in the tech sector which should continue to rebound strongly with the growing emerging markets.
7. Halliburton (NYSE: HAL)
In the energy sector, Halliburton is a great stock to add early in 2011. The stock price took a big hit as investors sold out on news of poor cementing in the December Deepwater Horizon explosion in the Gulf of Mexico. The price fell to $31 and is currently above $45. The price should continue to climb as oil and natural gas prices increase. The stock is still undervalued and now is the time to acquire it.
[Kevin] I don’t really go for individual stock purchases myself, but natural gas in particular interests me since there is so much supply right now that could be used to build a new energy infrastructure here in North America.
Dave is co-founder and editor-at-large of Credit Card Compare, an independent and free website to compare credit cards for businesses based in Australia.
To me the question isn’t so much what to invest in but more how to weight the various sectors and not to chase the hottest sectors. This of course is different for everybody. The choices above are fine although I admit I am leery of gold, given its run. It reminds of 2000 when there were so many great reasons to invest in dot.com – all of which explained why their prices had already exploded.
I agree with Kevin that individual stocks aren’t worth it. Also, I would think about sticking a big toe into REITs.
Tthe interesting thing is it seems that we’ve had another dot.com boom that is more sustainable, this time. Google, Apple, etc… are running on proven business models at least and are generating money unlike many of the 2000 startups! I think the biggest danger comes when you invest in something that everyone else wants to invest in because they’re simply looking for what’s “trendy”. The moment they change their minds you’re left holding the bag.
I agree that this can happen to gold, but I also think the bulls have their case and disagree with anyone claiming they can call the top. So, I don’t put too many of my eggs in the same basket and a good way of taking the emotion out of the game for me is to use target asset allocations instead of using daily news or opinion as a reason to buy & sell.
REITs could be something very interesting to get into especially in markets that have been depressed but otherwise remain attractive places to live & work. If I had the inclination to look after individual tenants I would even take a look at a good duplex, but up here in Canada prices are now much higher than they are south of the border. We haven’t had a crash or a wave of foreclosures to bring those prices down, but since they’re relatively high they could end up stagnating for a while until incomes catch up.
It would be interesting to see what kind of skin the writer has in the game, and know which of these recommendations he owns.
Personally, I’m not buying any more silver, but might if there’s a correction below $30.
The silver prices are nuts. I think the last price point I bought at was $19 or so; I haven’t rebalanced between different PMs in a while but it might be a good time to do so.
Gold? I don’t think I would invest in gold right now. It’s near its all-time high, and is bound to slowly come down as the peoples’ confidence about the economy rises.
Maybe, maybe not. I agree it was a much better time to go in after the 2008 crash when the prices were around $800 to $900. Now I would exercise more caution because all commodity prices are higher. I think the high prices are more about excessive money creation than confidence, though. People’s confidence will rise when the economy is healthy, but I don’t know if you can call an economy with huge levels of govt. spending and high unemployment “healthy”.
Instead of trying to guess everything, I personally decided that a 10% allocation was good for me, and I just buy & sell based on that because it takes the emotions out of the equation.
Hey Kevin,
Anything you are leaning towards above?
If REITs come down a bit, like REF.UN or BEI.UN, I’d be a buyer of either one. They are simply too pricy right now.
I’m personally not big on gold or silver.
We got about 2% of our RRSPs in VWO instead of EEM.
I’d be more interested in REITs at a lower price point, too, and I also find natural gas interesting. Otherwise I mostly lean toward indexed investing as it’s the best approach for my temperatment while I live vicariously through the adventures of our friend BTI as he battles against the market. 😉
Great article! Be sure to properly diversify your portfolio, unless that basket you stick all of your eggs in happens to be really, really sturdy. And it isn’t…
Cheers! The Marketeer.
I agree. I know some are against diversification, but variance can work against you as well.
I would have to agree with some of the other comments on precious metals. While I own several pieces of silver I feel that metals are moving way too fast and that eventually the bubble will burst. To tell you the truth I’m very weary about investing in anything at the moment because it feels like everything could drop at any time.
Whenever I feel like that I just stick to my regular contributions and let that go into broad-based indexes. If THOSE ever crash down next to nothing well it’s the end of the world anyways, so that’s probably going to be the last thing on my mind. Odds are more likely that the economy will recover in the long run so lower prices are good for buying. I face this dilemma too; in the short run I keep some cash on the side and if there is nothing really compelling then I can always use it to reduce my debt and therefore my risk.
If I had had even the slightest thought that silver prices would have appreciated so much I would have been sitting on bricks of the stuff. BF bought a silver bar last year and the value went up by something like $30 already. I’m a little pissed at myself.
Hah, me too, but hindsight is always 20/20. For all we know prices could have dropped to $10.
There are so many contradictory opinions on this. Some say gold is a bubble at it’s peak; others swear it will continue to rise. Some say emerging markets are overvalued; others swear it will continue to rise.
Takeaway lesson? You can’t predict the future. Ignore the sooth-sayers, stick to the fundamental principals of asset allocation, and call it a day.
I actually agree pretty strongly with this statement. On a fundamental level I see the case for gold and for some of the other areas mentioned, but there is so much noise in the short-term that you can end up running around like a headless chicken if you don’t have a plan. For me, that plan is currently to allocate 10% to PMs and rebalance if things go too far in either direction.
I wouldn’t buy gold or silver at this point either. Maybe in a few years when the price pull back. Emerging market and small caps were on a tear in 2010 and has pulled back a bit. I don’t think it’s wise to jump in at this point. It’s much better to keep investing a bit at a time and dollar cost average. Large cap has been doing much better than international and emerging market in 2011.
I’m not sure where I read it but I remember someone else writing with the opinion that large cap would be a better bet; I think it was due to the idea of “moats” and brand-name recognition overseas.
I like the AXP play. The high-end consumer definitely came back to shop in Christmas 2011, and if equity prices hold I can definitely see the wealth effect coming into play in Amex’s favor.
That said, with the Fed thinking about an arbitrary cap on debit card fees, I’m hoping credit cards won’t be next. For borrowers of Amex’s caliber, I imagine the majority of the revenue is from transaction fees, not interest payments (though I could be wrong, I haven’t explored any of their 10-Ks).
That said, I think there’s equal amounts of beauty in playing Capital One (COF) for a play on higher-return customers, and continued economic difficulty. Where American Express benefits from rising equity prices, and a general sense of recovery, COF could do very well with fee income if hiring stays weak. Sad to say, but COF literally sucks the life out of the lower and middle classes and trades at a sub-10 P/E.
Your last comment was very interesting. For all of the talk about the “predatory” nature of credit card companies and their fees, I do wonder what the industry would be like if high interest rates and transaction fees were simply made illegal. The people who pay their bills on time benefit from those who pay extra fees and charges, and a credit card can offer advantages such as consumer protection, insurance, as well as other perks.
On the other hand, gotta wonder what the prices would be like if they weren’t allowed to stronghold vendors into offering cash & credit items at the same price. A few places in Canada don’t seem to care and offer different prices anyways, but the govt. is now debating whether to ban this practice outright. There would be visible benefits to doing so, but with any regulation always gotta look at the unseen, too. 🙂
Thanks for the tips. I’ll be taking a closer look at many of these, based on your recommendations. 🙂
When it comes to things like this always good to take things with a grain of salt and read guys on both sides of the fence — I am for gold but I don’t think the bears are necessarily wrong about everything, which is why I haven’t put 100% of my money into there. 😉 I still believe asset allocation and diversification play very important roles, too.
Sorry, but reading these tips make me feel like you are chasing the past winners, and not looking to the future. All of these sectors and stocks have had huge runs, for whatever reason. I recently sold out of gold and emerging markets because of this (and booked a tidy profit too). Time to find a different sector!
Hey Robert,
There’s a lot of merit in what you say, and if you see my own recommendations I did say that it could be a good time to take profit or sit tight. 🙂 However, natural gas still seems pretty beaten up to me. What sectors are you looking into these days?
My interest lies in coming up with the asset mix (stocks, bonds, commodities) that I think is appropriate to the amount of risk I want to take, and not chasing the hot sector of the moment. I’d own some emerging markets, small cap, gold and silver, but I would also own things like copper, cotton, oil, international large cap and small cap, and even Japan.
I think the market had overreacted somewhat to recent news, so it could have been a good opportunity not necessarily just in Japan but in general, too.
Commodities are looking good right now. Especially with the pending inflation. I recently read an article about the end of quantitative easing and that is going to make for some nice volatility in the markets!
Black Gold is where the money’s at.
Range, Whiting, and Chesapeake!
As usual, another great write up. Keep up the good work, we do all appreciate it even if we don’t always post comments to say so.