DOLLARS AND SEN$E: The world might be in turmoil, but that doesn’t mean your portfolio has to be

Christopher Hanly pic (1)(2)BY CHRIS HANLY  

Investment Consultant, Gary Goldberg Financial Services

So far in 2015, market volatility has picked up sharply. With continued fighting between Russia and Ukraine, another half resolution to the Greek debt crisis, falling oil prices and some very disappointing fourth quarter earnings, it’s no wonder markets are zigzagging. And while the S&P 500 has made gains, according to CNBC, 90% of those gains have come as a result of 12 stocks (representing 2.4% of the index) rising sharply so far this year. Luckily the same doesn’t have to hold true for your portfolio. Let’s start with what you should expect in 2015:

  • Continued market volatility coupled with increasing performance divergence
  • Ongoing geopolitical turmoil that will make for scary headlines
  • Strong dollar, low interest rates and a rise in oil prices from current levels

The environment I’m describing above may not sound all that complex, but is problematic for Central Bankers. The stronger dollar will suppress our exports; rising oil prices in the second half of the year will tighten consumer spending slightly, and the ongoing turmoil in Russia and Ukraine as well as the European crisis will keep the overall environment fragile. In the short-term markets will likely remain range-bound with a slight upward bias. But keep in mind, so far the gains have been concentrated in a few stocks, meaning that most portfolios are close to flat year-to-date.

Here’s what you need to know and do to help reduce the impact of market volatility: Focus on quality – now this might sound easy, but does require quite a bit of work. Understanding a companies’ balance sheet and income statement requires work – simply investing in a “household” name won’t cut it anymore. Just look at the performance of McDonalds (down about 2% over the past year), or IBM (down over 10% in the past year) or Merck Pharmaceutical, which is up about 4% – compared to the S&P 500 which has gained about 15% over the past 12 months. If you’re going to be an investor in this environment, you have to do your homework – or work with someone who knows what to look for and where the danger zones are.

Going forward, investors are wise to focus on companies that are growing their top and bottom line and have a history of raising their dividends. This means that large-cap pharmaceutical and large technology companies are likely to outperform, while utilities and telecom shares could underperform. Of course, this is a broad statement and individual stock selection will be critical to success – the difference between having invested in Merck or Elli Lilly over the past year was about a 40% return. Similar performance divergence is likely to continue, so buyer beware and make sure to use caution before proceeding.

Christopher Hanly is an investment consultant with Gary Goldberg Financial Services in Suffern and can be reached at (845) 368-2900 ext. 247 or chris.hanly@garygoldberg.com.