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Keep investment expectations realistic

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(Special) - It's easy to get carried away when your investments do well. The tendency is to expect the good times to continue, which may cause you to abandon your long-term financial strategy and forget to rebalance your portfolio.

Last year was an exceptional one for stock investors. A report from Edward Jones shows U.S. large cap stocks in 2013 achieved returns of 32.4 per cent followed by overseas developed large cap stocks at 26.9 per cent, 13 per cent from Canadian large cap stocks and 3.4 per cent from stocks in emerging markets.

This compared to returns of only one per cent from cash, -1.2 per cent from Canada investment grade bonds, and - 5.5 per cent from real estate investment trusts, publicly-traded stocks which own real estate assets in Canada and some in the U.S.

"While last year was an exceptional one, recent experience can significantly distort investor expectations based on emotions, a narrow time period or unsustainable performance." says Craig Fehr, investment strategist with Edward Jones in St. Louis.

Edward Jones predicts stock returns will remain positive this year but more moderate than in 2013.

The global economy is expected to improve and reach a three-year high, helped by expansion in the United States, Europe and Japan. This growth can help support sustained corporate earnings growth -- the foundation for long-term market improvement - and rising consumer and investor confidence.

Domestically, Canada's Gross Domestic Product has risen to its highest level since 2011 and the economy is expected to grow at a reasonable, but below average, rate this year.

Edward Jones sees prospects for renewed business investment, with corporations in Canada and the U.S. sitting on cash reserves of nearly $2 trillion. It expects Canadian and U.S. corporate earnings to reach new all-time highs this year and predicts a return to normal and higher volatility, including periodic short-term market dips.

Interest rates also should begin to rise, leading to lower bond return potential compared to the last several years. The improving economy is expected to result in less aggressive monetary policy and slightly higher inflation expectations, which should lead to higher interest rates and lower fixed-income returns.

The Federal Reserve Bank of Atlanta recently predicted the U.S. central bank will end a bond-buying program at the end of this year and start raising interest rates in the second half of 2015.

Bonds delivered an average annual return of 6.4 per cent from 2008 to 2012 and an average of 11 per cent over the past 30 years. Investors should expect more modest returns in the future but they also should maintain an appropriate bond allocation in their portfolios to help reduce volatility. Since 1960, the average volatility of bonds has been roughly half that of stocks.

Fehr sees good "pockets of opportunities" for investors this year, but they need to be selective.

Equities in general look more attractive than fixed income securities, with more upside potential for equities in developed overseas markets such as Europe and Japan and less in emerging markets such as China and India.

"We doubt the above-average gains will be repeated in the coming year … but we believe domestic and international stocks are poised to deliver solid mid-to-upper single-digit returns, but with more bumps along the way," the report says.

"It's very important when equity performance has been so good to set your expectations, build the portfolio that is right for your situation and then align it with your long-term goals," says Fehr. "This can help you not only avoid emotional reactions but also put you in a better position to capitalize on opportunities that may arise, both of which will help keep you on track toward your long-term goals."

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2014 Talbot Boggs

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