Some analysts at investment banks are saying that the days of great returns are in the rearview mirror and that the only thing that investors can look forward to is below-average gains. First to the party was Morgan Stanley, which predicted that the 10-year return from a portfolio equally divided between stocks and bonds won't break 4%, according to this Bloomberg article. Then analysts at Barclays forecast "modest potential upside" for 2016.
But don't get depressed or lose heart just yet.
The analysts at Morgan Stanley expect 5% annual growth for just stocks (no bonds) in the next 10 years. But even if that winds up being the case, that would be an improvement for many Americans, because they haven't been investing at all in the stock market. In fact, a CNNMoney article in April summarized surveys showing that more Americans drink at least a cup of coffee each day than have money invested in the stock market. If you have your money in the bank or low-yielding Treasury securities, then 5% sounds like a great annual return. So the first step for many Americans, regardless of whether stock market returns will be below average in coming years, is to get invested in the market. Also, note that in that predicted 4% return over 10 years, Morgan Stanley equally divides its portfolio between stocks and bonds; that's an overemphasis on bonds, which have been offering very low yields in recent years. Don't put half your portfolio in bonds.
The best thing to do is to look for new trends among stocks. For example, right now would not be the time to focus on energy, but the tech sector still looks promising, and the biotech sector is ready to make a comeback. Once you spot a trend, look for the strongest stocks in that sector. Focus on stocks that offer both growth potential and that have profits improving every quarter. Also, don't focus on just the long term. Mix up your investing time frames. Some of your money can be used for long-term investments and some for short-term investments.
For the past few years, health care, biotechnology, the Internet and technology have been doing well. Had you invested in any of these sectors over the past few years, you wouldn't be looking at below-average or moderate returns. We selected random exchange-traded funds in these sectors and showed their returns over the past six years in the chart below. They are the iShares NASDAQ Biotechnology Index (IBB) - Get iShares NASDAQ Biotechnology ETF Report and the PowerShares Exchange-Trade Fund Trust (PNQI) - Get Invesco NASDAQ Internet ETF Report , which tracks the Internet sector. They showed returns way in excess of those from the broad stock market, as tracked by the iShares Russell 3000 Index (IWV) - Get iShares Russell 3000 ETF Report . We even threw in the ETFS Physical Palladium ETF (PALL) - Get Aberdeen Standard Physical Palladium Shares ETF Report to drive home a point. Although the entire precious metals sector has been taking it on the chin, Palladium has managed to deliver a positive return since the beginning of 2009.
This article was prepared by Sol Palha senior analyst at the Tactical Investor an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.