Hone Investing Skills by Using Hypothetical Portfolios
What happened this week?
For the week ending on Friday February 13, 2015 the Dow (DJIA – green/blue line) closed at 18,019.35 (+1.5%), the NASDAQ (orange line) closed at 4,893.84 (+3.25%), and the S&P 500 (red line) closed at 2,096.99 (+2.25%).
Graph courtesy of Fidelity Investments. Feb 9, 2015 to Feb 13, 2015.
The U.S. stock market ended the week on a positive note for the second week in a row and the S&P 500 and Dow reached new highs. The stock market was driven to new highs mainly because of the rebound in energy and European stocks. Energy stocks rebounded along with the increase in the price of oil per barrel, and European stocks rebounded based on news of a ceasefire in Ukraine and the potential for an agreement on Greece’s bailout.
What does it mean?
The European Central Bank is reportedly providing further emergency financing to Greek banks to ensure they can continue functioning smoothly. Investors had feared that Greece’s demands to rewrite its bailout terms would result in an impasse that could push Greece out of the euro and into bankruptcy, which would devastate Greece’s economy and roil global markets. Greece’s economy grew by 0.8 percent last year after collapsing by about 25 percent since the start of the financial crisis in 2011.
With oil prices on the rise, and positive outlook in Europe, investors are feeling optimistic. The U.S. economy is also showing signs of strength with the positive jobs report and consumer sentiment, though experts forecast European markets will outperform the U.S. this year. Many large European companies are doing well, and Germany reported better-than-expected economic growth Friday, a reminder that there’s still money to be made.
What should you do?
Stocks are expected to remain volatile for the rest of the year; things could change at the drop of a hat if something goes wrong in Greece, or oil prices suddenly plunge, or the Ukraine ceasefire collapses. However, savvy investors know that some of the best times to invest is when things look ugly and volatile.
To take advantage of the current economic outlook, ensure that you have some European exposure in your portfolio if you don’t already and if it fits your investing strategy. One thing to note as an American investor is the U.S. dollar-to-euro exchange rate. It is quite possible European markets could finish the year 10% higher, but after the exchange rate, an American investor may only be looking at a 4% gain in dollar terms. So, if you invest in Europe, stay with high-quality, large-cap companies and keep in mind that a lot of exporters will benefit from the depreciating euro. Large cap mutual funds or index funds with a focus on Europe will provide exposure and diversification.
Not quite ready to get your feet wet? Increase your knowledge and confidence by creating a hypothetical portfolio. Hypothetical portfolios are a great way to monitor stocks, mutual funds and other investments, while learning how they respond to factors such as economic and global news, interest rates, and individual or sector performance. An added benefit of a hypothetical portfolio is that it helps you to identify buying opportunities because you are better able to see when a stock you are tracking has declined significantly and the reasons behind the decline. If the reasons are superficial or temporary, and not due to a permanent change in the way the company operates, it could signal a buying opportunity.
There are several ways to create a hypothetical portfolio. Two sites that I have used to create portfolios in the past are http://finance.yahoo.com/ and https://www.google.com/finance. Creating a hypothetical portfolio on these sites is easy and just as easy to add the investments of your choosing. I recommend creating such a portfolio and filling it with stock or mutual funds that you are curious about and don’t yet own.
As always, continue with your quest to gain as much knowledge as possible. it will make you a better investor.