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Top Five Portfolio Ideas for 2021

By Carl Trevison and Stephen Bearce

Top Five Portfolio Ideas for 2021

As we start 2021, with COVID-19 vaccines and therapeutics approved for market, many investors wonder when we can return to more stable social and economic activity. Even though Wall Street recovered before Main Street, history suggests that the two may not diverge for long periods of time.

In the “2021 Outlook Report: Forging a path forward,” Wells Fargo Investment Institute (WFII) strategists detail opportunities that may arise in the new year, and how investors might take advantage of them.

Here, WFII strategists offer their top five ideas for 2021.

  • Hold the right amount of cash. Investors may be over-allocated to cash, as money market balances remain near all-time highs. In our view, investors should hold enough cash to meet short-term liquidity needs to avoid selling assets at inopportune times. One potential way to invest excess cash is through dollar-cost averaging—instead of investing one large sum, invest smaller sums over time.
  • Selectively increase risk. As investors look forward to the end of the pandemic, we expect riskier assets like stocks to outperform. However, we suggest that investors be selective in how they increase risk. We generally favor U.S. stocks over international stocks, because we believe that growth prospects are stronger in the U.S. Within the U.S. stock market, we prefer large-cap and mid-cap stocks over small-cap stocks, because larger companies tend to have higher cash balances, less debt, and better earnings growth. In fixed income, we favor taking credit risk and keeping interest-rate sensitivity neutral.
  • Consider exposure to higher-quality, growth-oriented sectors. Quality remains a key theme, but cyclicality could play a bigger role. We favor cyclical sectors that should demonstrate more consistent performance as the U.S. economic recovery advances. Our favored sectors include Information Technology, Health Care, Communication Services, and Consumer Discretionary.
  • Diversify income sources. Within fixed income sectors, we favor municipal bonds and investment-grade and high-yield corporates, as we believe those sectors are well positioned to offer yield. Emerging market bonds, dividend-paying stocks, and preferred securities may also offer attractive income streams to a well-diversified portfolio.
  • Be proactive, not reactive. Investors tend to exhibit certain behaviors that can lead to unwise decisions. In periods of high volatility, we suggest taking action thoughtfully and not reacting emotionally.

*A periodic investment plan such as dollar cost averaging does not ensure a profit or protect against a loss in declining markets. Since such a strategy involves continuous investment, the investor should consider his or her ability to continue purchases though periods of low price levels.

There is no guarantee that dividend-paying stocks will return more than the overall stock market. Dividends are not guaranteed and are subject to change or elimination.

All investing involves risk including the possible loss of principal.  Asset allocation and diversification do not guarantee investment returns or eliminate risk of loss.  Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile.  A stock’s value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.  International investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.  These risks are heightened in emerging markets. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities.  Bonds are subject to market, interest rate, price, credit/default, call, liquidity, inflation, and other risks. Prices tend to be inversely affected by changes in interest rates. Cash alternatives typically offer lower rates of return than longer-term equity or fixed-income securities and may not keep pace with inflation over extended periods of time. 

WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. 

This article was written by/for Wells Fargo Advisors and provided courtesy of Carl M. Trevisan, Managing Director-Investments and Stephen M. Bearce, First Vice President- Investments in Alexandria, VA at 800-247-8602.

Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.

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