Financial Predictions for 2010

As the manic-depressive decade of the 2000s came to a close, stocks staged a spectacular, global bust and powerful rebound. Housing also did the bust thing; we may be waiting a long time for the powerful real estate rebound, however.

So, where to invest in 2010? A mattress? Real estate? Apple? Many experts are predicting an economic landscape they call the “New Normal,” with slow growth and less-than-spectacular investment returns. But that doesn’t mean that the space between your mattress and box spring is your best investment. In fact, with interest rates at or close to all-time lows, your best moves in 2010 may be to refinance your mortgage and find ways to shield your income from taxes. And there will be plenty of investing opportunities — there always are. Look for them in stocks that pay dividends, short-term U.S. government bonds, and foreign stocks and bonds. To protect yourself from inflation, a dose of commodities and Treasury Inflation Protected Securities (TIPS) might be a good idea as well.

Here’s one inescapable reality of 2010 and beyond: The U.S. government is looking for money, and affluent taxpayers are likely to be the easy target. Credit card companies will also be looking for new ways to get your money. We’ll give you strategies to protect yourself against both, including an explanation of the new Roth IRA rules and the home buyer tax credit. And keep an eye on the federal estate tax — opponents call it the “death tax.” It’s supposed to vanish in 2010, but it’s possible Congress will keep it alive.

You’ll want to take advantage of the breaks for borrowers, invest in a few key mutual funds or ETFs and prepare yourself for battles with the IRS and the banks. Read the stories below to learn the smartest money moves for 2010.

Stock Predictions for 2010

Whether you’re a full-fledged “new normal” believer or not, U.S. blue chips are likely to offer exceptional opportunities in 2010. As MoneyWatch editor-in-chief Eric Schurenberg recently pointed out, GMO chairman Jeremy Grantham calls high-quality stocks with stable cash flows and low debt levels the “only free lunch” in the market now. You can buy a mutual fund that specializes in such companies, such as the Jensen Portfolio (JENSX), or you can hedge your bet by owning a low-cost index fund such as The Vanguard Total Stock Market Index Fund (VTSMX). As the name implies, you capture the returns of the total market, but since it’s top-heavy with the largest, most-stable companies, you’ll still benefit if they do indeed outperform.

One thing most observers agree on for 2010: Foreign securities will likely do better than domestics. Guillen recommends keeping at least a third of your money “in foreign stocks and bonds of countries that will be liable to grow quickly over the next five to 10 years.” International stock funds with excellent track records and below-average expenses include Oakmark International (OAKIX), Janus Overseas (JAOSX), and Vanguard International Growth (VWIGX). They’ve all beaten more than 80 percent of their peers over the past 10 years.

You can combine high-quality U.S. stocks and foreign exposure by owning U.S.-based multinationals that generate much of their profits overseas. To do this, you can take the index route, owning an ETF such as the iShares S&P 100 Index (OEF). The Jensen Portfolio offers similar exposure. Jensen co-manager Robert McIver has noticed a migration towards such stocks in his fund, due to a weaker dollar and changing corporate strategies. “The percentage of our companies’ foreign revenues has grown from 33 percent two years ago to 50 percent today,” says McIver.

If the slow-growth thesis proves accurate, high-quality dividend-paying stocks should do well in 2010, after lagging in 2009. “One of the underappreciated lessons of equity investing is the value of compounded income from dividends,” says Swanson. “In the stock market, 50 percent of investors’ returns have come from [compounded] dividends historically.” Two ways to buy a basket of dividend-paying stocks: Vanguard Equity Income Fund (VEIPX), with a 2.52 percent yield, and SPDR S&P Dividend ETF (SDY), with a 4.02 percent dividend yield.

Bonds Predictions for 2010

Interest rates on U.S. government bonds are at historic lows, which suggests they have nowhere to go but up. As a result, bond investors should stick with high-quality, short maturity bonds or funds that hold them. They won’t gain as much as long-term bonds if rates fall even farther, but they’ll lose a lot less if rates climb. Consider Vanguard Short Term Bond Index (VBISX), which owns a mix of government and corporate bonds and has beaten 90 percent of its peers over the past 15 years.

If you prefer to own nothing but U.S. government bonds, buy an ETF that holds Treasury Inflation-Protected bonds, such as iShares Barclays TIPS Bond ETF (TIP). To help your portfolio benefit from a falling dollar, consider a foreign-bond ETF such as iShares S&P/Citi 1-3 Years International Treasury Bond ETF (ISHG), which purchases foreign government bonds exclusively.

Commodities Predictions for 2010

Inflation may be low now, but if the global economy continues to strengthen in 2010, it’s likely to start heading up. Since commodities tend to rise as the value of a buck falls, you may want to keep 5 to 10 percent of your portfolio in commodities. MoneyWatch’s primer on commodity investing can help you do this wisely. Two ideas: the PowerShares DB Commodity Index ETF (DBC) and the Credit Suisse Commodity Return Strategy Fund (CRSOX). Both track commodity futures indexes that reflect actual commodity prices, rather than investing in stocks of commodity producers or distributors. Historically, commodity futures have been a better way to diversify, since movements in commodity stocks tend to be more correlated with the broad stock market.

Financial Forecast for 2010

* An inflationary cycle triggered by a massive increase in the monetary base
* A reversal in equities triggered by the unwinding of monetary easing by the Fed or other central banks
* A shift from a weakening dollar trend to a strengthening dollar trend if the Fed decides to tighten. This would affect our gold and emerging market allocations in particular
* Sovereign debt default by a major world player or a significant downgrading of sovereign debt (the most likely candidates being Greece and California)
* Rising mortgage rates as Treasury yields rise. This would have a particularly nasty effect on commercial real estate and the US banking sector (which still holds massive amounts of commercial real estate debt)
* A geopolitical upset such as a conflict in Iran. This could put serious strain on US-Sino relations and seriously affect the commodities market