4 reasons to brace for more volatility

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Business Week | By Charlie Bilello, U.S. News & World Report

The last five years have been anything but typical for stocks. Here are 4 factors that point to a bumpier market ahead, and 4 ways investors can prepare for it.

It's hard to believe, but the bull market is now five years old. From the lows in March 2009, the Standard & Poor's 500 Index ($INX) has advanced over 180 percent in what is now one of the longest and strongest bull markets in history.

Given this extraordinary advance, it is tempting for investors to rest on their laurels, expecting more of the same going forward. However, I would caution against such complacency as the next five years are likely to look quite different than the last. Let's review some important market factors.

Stocks were unquestionably cheap in March 2009. Economist Robert Shiller's P/E 10 or "CAPE" ratio, which looks at real price-to-earnings ratios of the S&P 500 over a decade, was a low 13.3, meaning stocks were priced to deliver above average returns going forward -- and this is precisely what occurred.

Fast-forward to today and you have the opposite setup. The Shiller P/E 10 ratio now stands above 25, well over its historical average, with stocks priced to deliver below-average returns going forward. Although this is not a short-term signal of market performance, this valuation metric has been one of the best predictors of long-term returns.

In March 2009, bearish investors outnumbered bulls by over 20 percent in the Investors Intelligence Sentiment Poll, which is a collection of forecasts by investor newsletter writers. Few people were expecting positive returns for equities in the year ahead. Entering this year, we saw the polar opposite. The bulls outnumbered the bears by over 45 percent in the same sentiment poll, which is an extreme reading historically.

Sentiment is an important factor to monitor because at sentiment extremes, the market often moves in the opposite direction of the crowd. Our studies confirm this, as forward returns are best when there is a high level of bearishness in the Investors Intelligence Poll. When there is a high level of bullishness -- as there is today -- few are left to buy, and forward returns tend to be below average.

In March 2009, the U.S. economy was also at the tail end of the worst recession since the Great Depression. Equity markets often post their best returns at the end of a recession and beginning of a new expansion, and we saw just that in 2009.

In June of this year, the economic expansion will hit five years, or 60 months. According to the National Bureau of Economic Research, the average expansion since World War II has lasted 58 months. We are therefore long in the tooth of this expansion.

That is not to say that this cannot be an above-average expansion, but that we are more likely to be closer to the end of the cycle than the beginning. This is important, as the most severe and lengthy bear markets are historically associated with a recession.

In the early spring of 2009, the Federal Reserve was still in the early stages of implementing what would become the most aggressive monetary policy in history. Fast forward to today and interest rates are still at or near zero and we are on the third round of quantitative easing. The Federal Reserve is expected to continue to wind down this latest round of quantitative easing this year, at which point the focus will shift to potential changes in the federal funds rate.

Though we'll never know exactly how much easy monetary policy contributed to stock market gains over the past five years, few would deny that it has been an important psychological factor. Without this psychological support system in place, investors should at the very least expect to see higher volatility in the markets. When the first round of quantitative easing and the second round of quantitative easing were wound down in 2010 and 2011, we saw just that. Volatility rose in those years and we witnessed sizable corrections of 17 percent and 21 percent in the S&P 500 index.

Investors need to understand that the last five years are not a typical five-year period and that the next five years are unlikely to look the same. Given the prospect of increasing risk and volatility in the equity markets going forward, investors should consider taking some of the following steps:

1. Rebalance your portfolio. Given the extraordinary stock market gains, investors are likely holding a higher percentage of equities today than their risk tolerance dictates. If they haven't already rebalanced their portfolios by reducing equity exposure and increasing exposure to other asset classes, now would be an appropriate time to do so.

2. Increase quality. Now is not the time to swing for the fences by choosing speculative names. Increasing exposure to high quality, larger-cap names that tend to hold up better during periods of market stress is a prudent move given the above factors. Additionally, as many experts view U.S. small-cap valuations to be among the highest in the world, lightening exposure to this area of the market could help reduce volatility going forward.

3. Go abroad. Although U.S. stocks are near all-time highs and at the higher end of their valuation spectrum, this is not true across the globe. In many emerging markets in particular, stocks have declined over the past three years and are at the lower end of their valuation spectrum. Increasing exposure to these areas could help boost long-term returns.

4. Raise cash or look to alternatives. There are few asset classes that can offer true protection during a volatile period for equities. Cash and uncorrelated alternative investments are two areas for investors to consider, especially for those investors nearing retirement who cannot withstand a large decline in their portfolio.

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3 reasons to be with shares

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Business Week | By Dana Anspach, US News & world report

It's not for everyone: most of us can not resist the urge to sell during a downturn. But if you understand the risks and not as crazy as it sounds realistic expectations, a 100% equity portfolio.

My individual retirement account money is 100 percent invested in stock index funds. Let me tell you why.

It is not because I believe that the stock market will take off. It is not because I have some guru read economic tip of the year. And it is not because I do not, that the risk understand the ownership of shares (shares is just another word for shares).

It is precisely because I understand the risk, I have realistic expectations and my choice is perfectly suited for my goals. Let me explain, the three reasons for my choice:

I think the most abused word in the field of financial risk. Everyone thinks they know what it means, but really nobody. How about a definition of risk, which everyone can understand? Ask two simple:

Can I lose money? If the answer is no, a safe Investition. Kann I lose my money? If the answer is Yes, would find out what it may take to ensure.
If you have a diversified portfolio of equity index fund, to lose your money, thousands of the largest would have company in the world will fail at once. Could this happen? Yes, but if it works, I don't think I'll care much, is how much money in my IRA. It is more likely that I find out will be to protect my property and my grow your own food.

My investment value could be half of their value in a few months? Absolute. But what do you care? I need the money in a few months. I need it in 20 years.

The volatility is going through in the next 20 years the fluctuations that is the value of my account. The risk of volatility for the average person is emotionally, or understand not the investments that they have, and leave after a big bear market. I know I'm to do that so that volatility is irrelevant for me.

The danger is that the stocks will do well not just in the next 20 years, and I get to retire and realize that I would have a better result by sticking with investment security. That's a risk I'm willing to accept.

I don't expect that be my IRA by 30 percent this year. I go not expected by 10 percent this year. Don't really care what it is this year. I expect that if it is I alone more than 20 years to deliver it a decent rate of return.

If I get a bad 20 years, I think I will make more than 0 (zero). If I get over 20 years, I would expect that it 12 percent or more per year on average. An average annual return of somewhere between 0 and 12 percent is what I expect.

Why it so far-reaching? Because I have no control over what market conditions provide the next 20 years. Everything I have control is how I invest. And I know if I my kept money in safe decisions, it would have a chance 12% per year earn, although it will earn more than 0 (zero).

I also expect that my accounts drops to every eight to 12 months, about 10 to 15 percent to the value. Why should I do that? That's about how often market corrections occur. In addition, I expect that some time might be in the next 20 years I mean to see account values from 30 to 50 percent. As bearish market corrections are not uncommon.

Because my expectations in line with the reality, I am completely comfortable to invest in shares. It is also the choice which is most of the objectives of my retirement money at this point in my life.

How do I know that my retirement has money 20 years? Well, I think I'll probably work until the age of 70 years. Not because I have, but because I just get bored and enjoy work. I am currently in my 40s.

Read more: 5 lessons from this bull market

Retirement money is a protected resource, if it so, the creditor is. This means that even if I screw up royally and filing bankruptcy at the end (I certainly don't expect that, but life can throw some nasty curve balls), I would not still redeem my retirement money to try to save the situation.

I also know I don't panic and bail from the market, when it comes, because I know it will go up from time to time.

All this knowledge together, and I know that my money has retired at least 20 years. My goal is possible in this period the highest return. Deciding to invest everything in stock index funds, is the option most likely to reach my goal. I know that higher yields are not one hundred percent sure. I also know that when I retire I on my portfolio move closer, changes and gradually add in more secure decisions.

I have other non-retirement money. And you know what? It is 100 percent invested in safe investments. It earned almost nothing. Why should I just leave it there? Since my livelihood in the financial markets is bound, and when the bear market, I expect that it probably happens is my income is down. During this period reserves will need to redeem I, and I want not on the stock exchange tied.

Even if your retirement money, and you have 20 or more years, a 100% equity portfolio, not for most people. Too many people confuse volatility for a permanent loss and are prone to high purchase and sale of low.

The final allocation of your investments regardless of you be a better investor by questions about risk, setting realistic expectations and have clear objectives.

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6 reasons your investments stink

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| By Brett Arends, MarketWatch

Have you ever looked under the hood of your mutual fund? Many of them suffer from a common set of problems.

Wouldn't it be great if there were an investment portfolio you could just forget about? Wouldn't it be great if you could free yourself from the madness of the market and go fishing?

Some people -- including, naturally enough, many MarketWatch readers -- are fond of playing the great game of the financial markets. But others just want to leave their money to work for them quietly.

I have a personal interest in this. I have come to accept that I cannot manage my own portfolio and write actively about the markets. There are strict rules keeping one's personal holdings a million miles from anything one writes about (and quite rightly so). This means I have to give my best tips to my readers, and then I can't buy them myself.

I've decided I just don't want the stress of managing a portfolio, either. Yes, I think a well-run portfolio can beat the market over time. But to do that you need a free hand. And you need to manage it actively: You need to be able to pounce on stocks, sectors, and even markets, when their price falls too far, and sell those that have risen too high.

So I have come to decide I just want to join Main Street and put my money into those fire-and-forget portfolios.

But then I started looking at them, and I came to a harsh conclusion: All the options on offer are fundamentally flawed. They're rubbish.

That includes "target date" funds. It includes managed portfolios by most financial planners. It includes those cookie-cutter "smartest portfolios" you sometimes read about. It even includes index funds.

I'm not even talking about the failings of "active management" -- the fact that most active, stock-picking mutual fund managers end up underperforming their own benchmarks. I'm talking about the new low-cost stuff as well.

Why are they inadequate?

Check out any target date fund and you'll find that 80 percent of the stocks they own are U.S. stocks. The U.S. accounts for about one-fifth of the world's total economy. Why should it account for most of my stock portfolio?

Even the people running these funds know this is silly. At a dinner a couple of years ago I sat next to the chief of the target date fund operation at one of the biggest fund companies in America. I asked him why nearly all their equity exposure was in the U.S. He sighed. "Because that's what the customers want," he replied.

Have you ever looked under the hood of these "index" funds and exchange-traded funds? The marketing departments of the fund companies claim that they are giving you the maximum diversification, what in Wall Street jargon is sometimes called "the market portfolio."

But it's hooey. Most of these funds are massively overweighted toward a handful of individual stocks, simply because those are already the most popular and "valuable." A fund tracking the Standard & Poor's 500 Index ($INX) has a fifth of its money in just 10 stocks. It puts 100 times as much of your money in Apple (AAPL) as it does in, say, Owens-Illinois (OI). That is not diversification. Indeed these funds automatically invest more in the more popular and fashionable stocks.

There is a great deal of research which says that an "equal weighted" portfolio -- for example, one that just holds the same amount in each of the S&P 500 stocks -- will beat these skewed funds over time.

I am tired of people telling me to put all my faith in that standard panacea, a "balanced" portfolio of stocks and bonds. Bah. Since 1982 stocks and bonds have both gone up together most of the time. And guess what? If they can both go up together, they can both go down together. That's what happened in the 1940s and the 1970s. People who entrusted their money to this simplistic "balanced portfolio" malarkey got royally hosed. Thanks, but no thanks.

They own too many U.S. Treasurys, and too many short-term bonds paying bupkis -- deadweight in the portfolio. They own too few zero-coupon bonds (the best insurance against a stock market crash), too few foreign bonds and too few from countries -- such as Norway, Australia and New Zealand, and certain emerging markets -- with the best credit.

Do I need some gold or gold-mining stocks? Timber? Commodity futures? Natural-resources stocks? Inflation-protected securities? If I need commodities, how do I protect myself against getting absolutely hosed on the fees or trading costs? The one thing I know: By the time the money managers work it out, it will be too late.

For example, there is a lot of research showing that over time cheaper "value" stocks, and those of "high-quality" companies, have produced better returns, with lower risk, than other stocks. It is highly likely this is a persistent feature of the market, based on the flaws in market psychology. Give me a simple portfolio that exploits that.

I'm on a quest to construct the perfect "all-weather" portfolio. Stay tuned.

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5 reasons singles need life insurance, too

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| By Neda Jafarzadeh, The Fiscal Times

While singles likely need less coverage than married couples, they often have relatives who would be affected financially by their deaths.

Life insurance is something only married people need, right? As with so many personal finance questions, the answer to this one is -- it depends.

There are several reasons you might want to purchase life insurance even when you’re single, though you may need less coverage than someone who wants to provide for a surviving spouse or children. That's because there may be other family members or loved ones who could be affected financially in the event of your death.

Many single people are now pondering buying life insurance, given that more adult Americans today are single than are married and that the median age at first marriages has never been higher. (It's currently 27 for women, and 29 for men.) Young adults today are also waiting longer to buy homes or have children, milestones typically associated with the purchase of life insurance.

Life insurers are actively reaching out to millennials (who are more likely to be single) by making their offerings more web- and mobile-friendly and by marketing their policies in unexpected places like Wal-Mart and Costco. Before buying a policy, use a calculator at sites like LifeHappens.org to understand how much insurance you need.

Many consumers get a basic life policy through work, which could cover the needs of a single person without dependents. Remember, though, that if you leave your job, your coverage doesn’t come with you.

Here are five reasons to consider purchasing a policy, even if you're not married

Not every young person needs life insurance – and if you haven’t yet established an emergency fund or you’re still living on your parents’ couch, buying life insurance certainly shouldn’t be a top priority. If, however, you’re making the maximum contribution to your retirement fund and have six months of expenses stashed in a savings account, you may want to consider buying a policy.

Waiting to get coverage until you’re married or have children could make a policy much more costly. A $500,000, 30-year term policy for a healthy, non-smoking male in Chicago costs about $35 per month. The same policy for a 45-year-old runs more than $60 per month, according to calculations by Term4Sale.com.

Another reason not to wait: The older you get, the more likely you are to contract a chronic health condition, which could push up your life insurance premiums or make you ineligible for coverage at all. Buying a policy now will lock in coverage while you’re still in good health and qualify for the best rates.

If your parents (or other family member or friend) co-signed a student loan or a mortgage with you, they’ll be fully on the hook for the amount owed in the event of your passing. In addition to debt, burial costs can also be expensive – the average funeral costs more than $7,000 -- and it can set back loved ones without a significant amount of savings.

If your funeral or your debts will be a significant financial hardship for someone else, consider getting a low-cost policy to cover those expenses -- a 10-year term policy naming that person as the beneficiary could take care of such expenses. With unemployment still stubbornly high and most Americans with dangerously low savings accounts, the last burden a grieving family member needs is a loan company hounding him or her for payments.

This is probably the most important reason a single person should purchase life insurance. Nearly 16 million unmarried parents live with their children, according to the U.S. Census. Even if you don’t have kids, there may be others who depend on you financially, including elderly parents who need caretaking or special needs siblings. The right life insurance policy can serve as a financial safety net for those you care about most.

Work with a financial planner to determine how much life insurance you need on top of any other assets you have in order to insure that your dependents are properly cared for financially after you’re gone.

If you’re a small business owner with partners, a life insurance policy can allow your partners to more seamlessly purchase your portion of the business. Partners in the company would enter into a buy-sell agreement, buying policies (either as individuals or as a company) on the lives of the co-owners with the understanding that the payout would go to the deceased partner’s heirs without giving them a stake in the company itself.

If there’s a cause that you’re passionate about or you’ve got someone you’d like to take care of financially (even if they’re not dependent on you now), purchasing a life insurance policy can help meet those goals. This kind of purchase only makes sense if you can comfortably afford the policy after funding emergency and retirement savings, as well as paying down any high interest debt.

If you do buy a policy as a single, it’s important to re-evaluate your insurance coverage after life events, such as the birth of child or a marriage, to make sure you're still appropriately covered and to update your beneficiaries. If coverage purchased now becomes inadequate for your needs at a later date, you can buy supplemental coverage, rather than starting from scratch.

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10 reasons to buy Apple now

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| By Jeff Reeves, MarketWatch

The company has changed, but so have expectations. Here's why the consumer tech giant's stock is a good long-term value play.

At long last, Apple (AAPL) is finally in the green year-to-date in 2013. And while the stock has still woefully underperformed the S&P 500 ($INX), it's undeniable that the tech giant finally has some swagger back after some recent strength.

But what's next? Is Apple stock ready to push even higher, or just giving investors another head fake?

I'm convinced it's the former -- and that Apple stock is a buy for long-term investors.

No, Apple is not on its way back to the valuations of late 2012 when it topped $700 a share. The company has changed a lot since then, and so have expectations.

And yes, there's the risk of buying a top. Shares are up over 40 percent in less than six months, and tech broadly is starting to feel a bit frothy to many market watchers after a big run in 2013.

But Apple's run since July has been built on a number of very real improvements in the business that bode well in the long term for shares even if we may see volatility in the short-term.

Investors who think this is just a short-lived uptrend amid a choppy "new normal" for AAPL stock are not giving the company credit where credit is due. Here are 10 reasons to buy Apple now:

Apple is at a 52-week high after its big run from the summer lows, but still has a reasonable forward price-to-earnings ratio (P/E) of less than 12. That's lower than the average forward P/E of about 15 for large-cap tech stocks in the S&P 500.

Furthermore, that P/E of 12 is only slightly higher than the typical range Apple traded in over the past few years -- and anyway, that E part of the equation was unfairly low as Apple in the past year has regularly lowballed analysts on its profit forecasts.

Tech giant Adobe (ADBE) broke down recent holiday e-commerce trends, and Apple was the runaway winner among mobile shoppers. According to Adobe, "iOS-based devices drove more than $543 million dollars in online sales, with iPad taking a 77 percent share. Android-based devices were responsible for $148 million in online sales, a 4.9 percent share of mobile driven online sales." Say what you want about overall market share, but Apple is the clear winner among people who actually spend money -- a much more valuable statistic to investors than adoption with no dollar signs attached.

Last week, we finally got confirmation of a deal between Apple and China Mobile (CHL) to put the iPhone into the biggest telecom market in the world with access to some 700 million subscribers. Yes, Apple will still have to figure out how to connect with low-income consumers with its high-price devices. But Apple's China market share was just 5 percent to start 2013 -- meaning massive untapped potential.

Everybody says it, so I will, too -- Apple is a cash cow.

Its stunning stockpile of $146 billion continues to grow and is a giant pile of untapped potential. And if the cash alone wasn't enough for you, Apple has shown it's willing to borrow on top of that. Apple raised $17 billion this year in a bond offering with rock bottom rates -- including $3 billion of debt at just 3.85 percent on its 30-year bonds. The cash is plentiful and debt is cheap, giving Apple a lot of dry powder for 2014 and beyond.

Buyouts are one use for that dry powder, and next year could be the time we see the first major Apple acquisition. Apple had been notoriously reluctant to buy out anybody, likely because of Steve Jobs' rather top-down view of the world, but the company has changed in many ways since Tim Cook took over. That includes shopping around. Apple's $200 million purchase of Twitter (TWTR) data provider Topsy recently could be the first foray into growth via acquisition -- something the company has ample cash to bankroll.

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10 reasons to rent in retirement

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| By Emily Brandon, U.S. News & World Report

Retirees often need the help with maintenance and repairs that renting provides.

In retirement, you don't necessarily need a house with several bedrooms and a big yard. In fact, stairs to climb and a yard that needs mowing can become a significant liability as you age. Renters get to outsource emergency repairs and some home maintenance chores, which can make life easier as a retiree. Downsizing to a smaller apartment can also improve your retirement finances. Here are 10 reasons to become a renter in retirement.

Tap your home equity. When you sell your home and become a renter, you can add that home equity to your nest egg, which could significantly improve your retirement finances. "Selling the home and renting gives you capital that is able to produce and earn income," says Neal Van Zutphen, a certified financial planner and president of Intrinsic Wealth Counsel in Mesa, Ariz. "It costs less to rent than it does to own. There's no maintenance costs, there's no property taxes and sometimes utilities are included."

Downsize to a smaller place. Once your children move out of the house, you don't need as much space or stuff. "Downsizing to a living space more appropriate for current needs can be additionally helpful if moving from a multi-story to single-story home, i.e., eliminating stairs," says Andrew Carle, founding director of George Mason University's Senior Housing Administration.

Lower your cost of living. Retirees no longer need to live in expensive areas near the office or in good school districts. Sometimes moving even a short distance can result in a drastically lower cost of living.

Outsource home maintenance. In many rental agreements, it is the landlord's responsibility to maintain the property, including the lawn, exterior of the building and many of the appliances. You are "shifting the burden of home maintenance and repair to the landlord," Carle says. "This includes interior, but also exterior things like lawn maintenance and snow removal."

One phone call for repairs. When something breaks, you don't have to spend your day finding a person to conduct the repair or getting price estimates. You simply call the landlord or administration office and put in a maintenance request. "A lot goes wrong with older homes and that's why a lot of people want to relocate," says Debra Drelich, a geriatric care manager and founder of New York Elder Care Consultants. "You don't have to deal with it when things break – you just call the super."

Live near the amenities you use. Some retirees choose to relocate to a walkable location near stores, parks and recreational opportunities. "You can walk to things like shops or the theater," Drelich says. It can be useful to base yourself near public transportation in case you reach a point when you no longer want to drive.

Relocate near family. Retirement can be an opportunity to move closer to your children and grandchildren. "If you rent close to your family or children or grandchildren, you have less travel expenses to see family," Van Zutphen says. You can also help each other with childcare and eldercare as needed.

More flexibility. Renting gives you the flexibility to experience a new location or lifestyle without a long-term commitment. "Renting gives you an opportunity to try out a place and see what a place is really like to live in," Van Zutphen says. "Rather than buying right away, you can rent for a full year and see if you can imagine yourself living in Florida or Arizona."

Find age-appropriate features. Retirees can select apartments with amenities that will allow them to live independently for as long as possible. Features to look for include apartments with a minimum amount of stairs, convenient laundry facilities and handles in the shower. "I live in this 95-year-old house with many flights of steps, and this is not the house I am going to be able to grow older in with all the steps," Drelich says.

Extra help is sometimes available. Some senior housing arrangements allow you to live independently for as long as you are able to, and then offer increasing levels of services as you need them. "For those who are getting older, there's independent living, and then when you need it, there is assisted living and nursing homes and long-term care," Van Zutphen says. Many senior communities also offer the added bonus of social activities for residents and a chance to make friends.

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3 reasons the market isn't overvalued

10:47 AM market, overvalued, Reasons No Comments

| By Anne Kates Smith, Kiplinger's

We're overdue for a correction. But for investors with a long-term view, share prices, while hardly in bargain territory, are still reasonable.

If opinions about the direction of stocks didn't differ, there wouldn't be a market. But as market indexes continue to climb to record highs, the dichotomy seems greater than usual. Is the stock market a bubble or a bargain?

As usual on Wall Street, the answer depends on a number of variables, the most important of which is your investing time frame. For investors with a long-term view, share prices, while hardly in bargain territory, are reasonable. Stocks may not be as cheap as they once were, but they are not yet overvalued, let alone in bubble territory. Here's why:

No argument, investors have bid up the amount they're willing to pay for each share of corporate earnings. A year ago, the Standard & Poor's 500 Index ($INX) commanded a price that was just over 13 times the average estimated per-share earnings of its constituents for the year ahead. Now, the S&P trades at 15 times estimated 2014 profits. But that's just about the average, going back 30 years, and it's less than the average of 16.5 of the past 15 years. Since 1996, P/Es have ranged from 10.5 to more than 25.

Given accelerating economic growth, low inflation, rock-solid corporate balance sheets and improving sentiment among stock investors, the current average P/E is reasonable, say the bulls. It could even go higher. It's only normal that we would have a period of expansion after earnings multiples compressed throughout the first decade of this century. A P/E of 18, however, should give you pause; 20 would be a waving red flag.

Stock prices bottomed on March 9, 2009, in the aftermath of the financial crisis. From that day through Nov. 12, stocks soared 161 percent (189 percent, including dividends).

In terms of both longevity -- the advance is approaching its fifth anniversary -- and the rise in stock prices, this bull market is above average. But what if you were to date the bottom of the market a different way -- not based on when prices hit their lows, but when other market yardsticks did, such as price-earnings ratios or price-to-book-value (assets minus liabilities) ratios?

Using those yardsticks, says market strategist Jeffrey Saut, of Raymond James Wealth Management, the market didn't reach bottom until November 2011. That would make the bull just two years old. There is precedent for Saut's market-dating mechanism. Recall the period from 1966 to 1982, when the market traded in a relatively narrow range. The low in prices came in 1974, but the valuation low didn't arrive until August 1982 -- and that marked the beginning of a five-year bull market.

Parts of the market do indeed qualify as overpriced, while others are still reasonably priced. Shares of companies that cater to consumers -- both those that sell the stuff we use every day (from soap to soda) and those that sell non-necessities (think retailers and restaurants) -- are expensive. So are the stocks of utilities and the like that serve as high-yielding bond surrogates, which have attracted investors in droves since the financial crisis ended.

"I'm staying away from defensive stocks and pure yield -- consumer staples, telecom and utilities," says Mike Wilson, chief investment officer at Morgan Stanley Wealth Management. "You won't lose your shirt, but they're expensive if you believe interest rates will grind higher."

You'll find better values in health care, as well as in stocks that swing with the economy, such as energy, manufacturing, industrial and technology companies. Large-company stocks are better deals than stretched small-company shares; choose shares of globally diversified companies over U.S.-focused firms. Globally diversified firms, which normally command higher P/Es than their U.S.-focused counterparts, are selling at their lowest valuations in a decade, according to BofA Merrill Lynch Global Research.

We're overdue for a correction. The last breather that the bull took ended in October 2011, and stock prices are up some 60 percent since then. If history is a guide, it looks like the market will sail through the December holidays on a high note, says Sam Stovall, the chief market strategist at Standard & Poor's. The market's fundamental underpinnings are strong. The economy is expanding, inflation is low and corporate earnings are growing.

But there are some signs of froth in share prices. Chief among them is the recent, rapid acceleration of money flowing into stock mutual funds and exchange-traded funds. In October, those funds took in $53 billion more than came out, according to market research firm TrimTabs. That's the fourth-highest monthly net inflow on record.

The market for initial stock offerings is also heating up, paced by the much-ballyhooed debut of Twitter (TWTR), which soared nearly 75 percent its first day out of the gate. Investor sentiment, often a contrarian indicator, is increasingly bullish, with 46 percent of investors polled by the American Association of Individual Investors in the bullish camp, compared with a long-term average of 39 percent.

Those may be signs that the bull market has gotten a little ahead of itself. A pullback (losses of 5 to 10 percent) or a correction (up to 20 percent) would not be surprising. But longer-term, this bull has room to run.

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5 Reasons for a correction to expect

3:30 PM correction, expect, Reasons No Comments

| By Jeff Reeves, MarketWatch

While optimism goes a long way on the capital markets, stock prices can defy only gravity, so long before reality exceeds again unrealistic expectations.

The market continues to truck higher and the S - and P-500 now sits on about 26 percent in year-to-date gains.

But they expect not to last.

For many reasons, the market seems ripe for a correction. No crash, mind you as the Permabears and the bunker crowd would like to see, you can catch only a reality with Wall Street up 10 to 15 per cent jump in the broader indexes.

You see, the face ripping rally for many stocks almost completely in the year 2013 based on mood. And while optimism goes a long way on the capital markets, stock prices can only defy gravity so long before reality surpasses again unrealistic expectations.

Here are five reasons why I have a two-digit correction in the S- & P-500 sometime in the next six months are:

Mutual fund share-based have absorbed more money in 2013 than any year since 2004 - $76 billion, to be exactly vs. total outflows of $451 billion from 2006 to 2012.

If you want to be a fatalist, is the fact that the "dumb money" on the market is returned to the ultimate sign of a top. Alexandra Scaggs of the Wall Street Journal tracked a group of inspiring MOM investors who offer that offers such as "I still think there's huge head on the Exchange... I don't want to miss."

Clearly, the return of retail investors could be more buying pressure on the market and push indices 2014 offer more record highs. But when people start to buy stocks simply because the shares rise, it sounds to me the definition of a bubble.

The Dow Jones was the 37th record high set on Thursday - and as usual, financial media alert investors that happy.

But it is worth noting that eclipses 34 record highs in 2007, correctly set before fell below out.

Records alone are not characters of a bit, of course. Finally the market place 69 new highs - a record sum from record highs, if you will - and further drive in 1995, until the dot-com crash.

But the height of 2013 feel differently in this respect that they are given great importance as an "all-clear" type. Keep in mind that the unemployment rate in the mid 5-percentage range compared to a peak in 1995 was more than 8.2 percent in 1992. Also concerns you, that it not a single year in the 1990s with a GDP growth rate of less than 4 percent. A bull market in stocks was big, but also part of a broader story of the economic might of the Decade.

That has not happened in 2007, such as cracks in the growth story began to emerge. And that is certainly not the case now as persistently high unemployment and anemic growth are the rule.

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5 Reasons for the index funds add to your portfolio

3:00 PM funds, index, portfolio, Reasons, vanguard No Comments

| By Daniel Solin, US News & world report

Tests according to mutual funds and ETFs passively track produce their benchmarks better returns for investors than actively managed ones.

Almost 18 years ago, Rex Sinquefield, co-founder who fund advisors, dimensional had to say this about the debate between the advocates of active and passive management: "so anyone who still believes that markets work not?" It apparently is only the North Koreans, the Cubans and the active Manager."

At that time, were only a few in the investment sector especially concerned about index-based investing. Sinquefield's comments were largely ignored. How times have changed. "Debate" has all but disappeared as the evidence in favor of the index was mounted to invest (which I like to "evidence-based investing").

You will need no further than the SPIVA means scorecard for overwhelming evidence to support the destruction of active management. In an article in the "Journal of indexes", Cletus dash, formerly Managing Director of S - & P-indexes, mentioned this "lessons learned" managed from a decade tracking the performance of the index and active funds:

Outperformance over longer periods of time.All measured a majority of actively managed funds exceed five-year cycle their indexes.

Outperformance in theorize.In the two bear markets in the last decade, a majority of actively managed funds their benchmarks was under.

No evidence of performance persistence.Dash takes the chance powerful funds looking for a prospectively with past outperformance, as an indicator of "similar or less than random expectations."

Fixed income funds fare even worse than equity.Have to dash "almost all municipal bond funds difficulties, that the S & P national AMT-free municipal bond index to beat."

Indexing works in small caps.There is no merit, the oft-repeated mantra of the active managers who can surpass it in the small-cap markets, because these markets are less efficient. Indexing works as well as for small caps for large-caps.

Investors have taken note of this information and have money in cast index funds, dealing a blow to active managers. According to a vanguard (citing data from Morningstar) at the end of 2012, assets in index U.S. domiciled mutual funds and 34 percent of shares and 18 percent of fixed income exchange traded funds accounted for funds.

A vanguard study, "The case funds invest for index for UK investors," showed that active fund managers in a range of funds for investors in the UK "have their benchmarks over most fund categories and time periods as below average." Adam Laird, a passive investment manager at Hargreaves Lansdown, commenting on the report by stating: "this study is further evidence of a sad truth-many active managers fail."

The threat of the traditional securities trading is now too big to ignore. Active Manager can not compete based on the data, and seem to be resorted to name-calling. The "debate" was sunk to new lows recently with a comment in an article in the financial times, written by David Smith, UK-based active fund managers with Hargreaves Lansdown fund managers. Smith is observed that passive management a "parasitic industry" will benefit from the activity of the active Manager. Smith observed that index funds "are only a smart strategy if you believe that active managers will keep the market largely efficient." Smith not only rejects the efficient-market hypothesis, but is "surprised" that others do not match.

Vanguard founder Jack Bogle on Smith's conflict with the finding responded: "whether markets are efficient or inefficient, is beside the point. The cost questions hypothesis is all that is necessary to explain why works indexing: gross on the market as a whole, less the costs to get back, that this return is equivalent to who will actually receive the net return investors. "

The shift of tactics by active Manager of indexing "upstarts", to ignore insults, says for investors. Presumably, if they have data to support the base for their investment strategy and living expenses, she would publish it. Investors would be well advised to focus on the evidence and the heated rhetoric.

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12 Reasons not to fear, market bubble

12:30 PM bubble, market, Reasons No Comments

| By Richard Satran, US News & world report

Investing is never without risk, of course, but memories of the last crash cause investors to miss, the biggest gains in years.

The idea of the financial markets in a another free fall as it will go, which has taken in 2008 never fully by many investors left behind have been. It is one of the reasons, the current has missed rally many of them and stuck with bonds.

Now loans are interest rates, even as risky to spoken bubble, pop is, as soon as the Federal Reserve hikes. Meanwhile, stocks see in 2013, the biggest gains in years.

What is an investor to do? It's not exactly "don't worry, be happy" time. But too much anxiety can be counterproductive.

Investors should start by checking all these dire warnings. You may not all apply. It's never stupid to keep a dose of healthy skepticism. But it's the perception that financial assets completely crazy from the 'Real economy' are hard to.

Here are a dozen reasons why stocks and bonds are not bubbles, bursting wait (along with some reasons why analysts and fund managers say it could still Trouble, even if it not bubble).

Already in August 2008 not much there talk of stocks at risk. Google trends shows that the search terms "bubble has" and "stock crash" fell to the lowest level in nearly five years in the month before the crash. You have increased steadily this year.

But one thing is search queries. Reviews are another. And that could be high. The yields on bonds are close to all-time lows, not even for the costs of inflation. Based on underlying earnings, stocks are close to their average. "The case for a bubble in the bond market is strong. The case for a bubble in the stock market is not a strong", says Hugh Johnson of Hugh Johnson advisors. "The real question: can the Fed let the air out of the bond market in a way that bond market remains orderly trading?"

From the crash of 2008 Rose bonds prices, markets stabilize help. The chance of a "double bubble" is highly unlikely. Unless, of course, this time is different. The threat is that the stocks just get the investor attention because there are no other good option.

"Bullish on, people have shares compared with Treasury bonds with their low historical views. If the upwards, that the story falls apart..., "says James C. Roumell, President and portfolio manager at Roumell asset management.

The most important 10-year Treasury Note fell 25% in price last month its yield jumped 50 basis points (half a percentage point). Prices move to do inverse. But bond investors, nimble bunch, can not simply out of necessity or hold out of habit. "Many people still have their own bonds, because they still think that they are safe.

Sometimes due to investment policy for a fund or an institution, not get,"says Mark Germain, Chief Executive Officer of beacon wealth management.

Shares not steadily, but won in jumps. The first day of trading this year saw a 300-point Dow rally of 2.3%-top winning year, but nowhere in the top 50-day share gains. But just because it is not happening does not mean that investors become more rational.

"If the people on the sidelines suddenly jumped into the market, it could be much damage. Panic buying would, that a bad thing with a market around 10% overvalued", says David Edwards, President of the Heron financial group.

(5) The fear of a "bubble" is partly based on a misconception that people hold huge amounts of interest rate sensitive long bonds

But Treasury data show that the average debt maturity is less than five years. In the last few years the Fed has been to clean up long bonds, and only a few were issued.

This is not to say that higher prices is not that hard to navigate. Price rises would hit major sectors of the economy, including mortgages. "Fixed-rate bonds, the returns have been low for so long... the mentality is still in, will be burned", Brian Levitt, Chief Economist says the Oppenheimer funds. If the Fed raises after all short-term interest rates, it will affect a wide range of borrowing costs.

Housing is a key to stability, since it was the cause of the latest crash and his jump created a perfect storm, froze credit markets and consumer confidence hammered. The bad news is that vulnerabilities in real estate remain. "The recovery of the real estate market is not closed," said David Blitzer, Chairman of S & P index Dow Jones indices as the latest home data was announced. Foreclosures remain high, and rising mortgage interest rates.

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