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INVESTMENT: Investment Mistakes to Avoid in 2015
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Investment Mistakes to Avoid in 2015

By Michael Dow

BT 201502 32 Investment gold2People are always telling us what we should do with our money but they seldom offer advice on what we shouldn't be doing with it. When it comes to sensible money management, managing risks is just as important as finding the right opportunities. All things considered, 2015 could be a very turbulent year for stocks, bonds and major world currencies. Right now we are seeing a series of worrying signs. The Eurozone is still stagnant, there is plenty of geopolitical turmoil all around the world, commodities are crashing, China's breakneck growth is slowing down and the U.S. is gearing up for an interest rate rise. Perhaps most worrying of all is the fact that major stock markets are in the midst of an incredibly long bullish cycle. What does all of this mean for investors? This month we take a look at some of the potentially disastrous strategic moves for 2015.

Bad bonds
Last year the bond market pessimists were proven wrong - with many bonds and bond funds outperforming equities. Now that the American economic recovery is in full swing, there is a consensus amongst analysts that the Federal Reserve will hike interest rates towards the latter half of 2015. Inevitably this will have a profound impact on the bond market.

JP Morgan's Bill Eigen, a world renowned bond trader, recently suggested that "Investors do not realise how quickly bond prices will fall when interest rates rise". He said that "I have never been so nervous about investing in bonds during my entire career, because yields are close to zero and, in fact, for some countries, such as Germany and Switzerland, bonds have become so expensive that their yield is negative. With yields so low, the central banks, in trying to get global growth back on track, have broken the market. When interest rates rise, which I believe they will do in the US next year and then shortly after in the UK, bond funds could easily fall 10pc and perhaps much further". James Foster, manager of the Artemis Strategic Bond Fund, warns that "for investors buying today who have a three to five-year time horizon, bonds are a bad place to be. The false conception with bonds is that investors cannot lose money, but they can and, indeed, will when interest rates rise".

Obviously a bondless portfolio is not a wise move, but investors will need to be very cautious this year. Those who have more than a 30-40 percent exposure would be well advised to cash in a portion of that and reposition themselves towards stocks and other less risky asset classes.

BT 201502 33 Investment Redeem Savings Bonds Step 4Not so hot commodities
Commodities have been talked up for some time now and for good reason. For years we have had a super cycle from which certain investors made a lot of cash. Towards the end of 2014 it became increasingly apparent that the boom was over. Now we are seeing a downward trend across with board, with everything from oil to sugar prices have sunk well below their historic highs. In part the broad slowdown has been fuelled by weaker demand in key markets like China and the European Union. The strengthening of the U.S. dollar has also played a significant role. Analysts are saying that none of these trends are going to change any time soon.

Given how cheap the asset class looks it might seem like 2015 is the year to acquire discounted assets. However, it remains to be seen whether the commodity price slump has bottomed out. If key consumer markets continue to slowdown then this will affect everything from wheat and sugar to industrial metals. In terms of oil prices, it is hard to say how much further they can or will drop over the course of the year - especially if shale production continues to surge and OPEC keeps refusing to decrease output in order to push prices higher.

With so many unknowns about when a turnaround will take place it is very difficult to take calculated risks in this sector. Moreover, it is worth bearing in mind that we still haven't seen all of the consequences of the oil price crash on the equity markets. Commodity stocks and futures are a buy for the brave this year.

Going for gold
BT 201502 34 Investment 2015 01 09T115350Z 1 LYNXMPEB080FT RTROPTP 4 GERMANY ECBPrecious metals have lost their shine big time since the glory days of the post 2008 financial crisis era. At the moment gold is hovering around 1200 USD per ounce and it doesn't look to be going up any time soon. The two of the main drivers of higher gold prices are economic and political uncertainty and a bleak inflation outlook. The panic that ensued after the 2008 global financial crisis has largely subsided, meaning that fewer investors are running to precious metals for safety. Similarly, the risk of hyperinflation occurring in the world's largest economies is slim. In fact inflation in the United States, China and the United Kingdom is very low, while the Eurozone has entered a deflationary period. Even if central banks intervene to increase inflation there won't be enough fear to spur a major wave of gold buying. Added to all of that of course is the fact that interest rates in the U.S. look set to go up. This will likely increase the dollar's value further.

Considering all of these factors, it doesn't look like gold will make a significant comeback this year. That doesn't mean that precious metals are any less important for adding diversification to an investment portfolio but it does make capital appreciation unlikely.

Hunting for high yields
One always has to exercise caution when a stock, bond or REIT is paying out staggering high rates of return to investors. It goes without saying that with everything that is happening at the moment it would be unwise to assume that corporate earnings or bond yields are going to stay at the same levels. Dividend investors would be advised to go broader in 2015, perhaps by staying away from individual stocks and instead seeking out ETFs in stable sectors that offer a decent dividend pay-out.

Exposure to high risk regions
It may sound like common sense but it is worth emphasising that 2015 is probably not a good year to be investing in places like Russia. With the country's stock market and currency still falling and the economy entering a deep recession, it doesn't seem likely to be a good destination for capital investments any time soon. Europe is also looking very risky at the moment. The Eurozone economy is still stagnant and with all the underlying monetary and financial woes in the region there is simply no way of predicting how things will play out over the course of the year. And many of the emerging markets that have been excellent locations to invest in over the last few years are starting to look riskier. This includes countries like China, Brazil and Thailand. Stocks, currency and real estate investments in the non-Eurozone developed economies all look like better prospects in 2015.


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