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Kiplinger Money Power: Where to invest in 2018

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Investors who fare best in 2018 will be selective, with a focus on high quality. Sectors, and stocks within sectors, are moving less in lockstep than they have been, which means that stock pickers will have a chance to shine.

Characteristics of high-quality companies include consistent earnings and dividend growth, strong balance sheets and higher returns on equity (a measure of profitability) than the average S&P 500 company. Such stocks should sidestep the worst losses if the market turns down, but they’ll also do well in strong and even in sideways markets, says Brian Belski, of BMO Capital Markets. Stocks BMO likes include software giant Oracle (symbol ORCL), truck manufacturer Paccar (PCAR) and insurer UnitedHealth Group (UNH).

Stock sectors poised to outperform in 2018 include financials, especially banks, and technology. Banks will profit from higher interest rates, a growing economy and lighter regulation.

Global Stock Chief Saira Malik, of investment firm Nuveen, recommends Bank of America (BAC) for its strong loan growth, robust cost controls and high credit quality. Or consider an exchange-traded fund. Financial Select Sector SPDR (XLF) is a member of the Kiplinger ETF 20, the list of Kiplinger’s favorite exchange-traded funds.

Don’t confuse today’s new-economy tech companies with those of the dot-com era, says Jonathan Golub, chief U.S. stock strategist at Credit Suisse. Today’s titans are “well-managed businesses with terrific profits, not speculative investments,” he says.

Malik recommends Google’s parent, Alphabet (GOOGL). Or check out Fidelity MSCI Information Technology Index (FTEC), which has the lowest expense ratio (0.08 percent) of any tech-sector ETF and gives you access to 360 tech names.

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Companies that do well when the economy is growing should prosper in 2018. Among so-called cyclical stocks, investment firm CFRA recommends Honeywell International (HON), an aerospace and industrial conglomerate whose stock dividend yielded 1.8 percent as of late last year. Or gain exposure to hundreds of industrial firms with Vanguard Industrials (VIS).

Stocks are preferred over bonds for 2018. Bonds that have shorter-term maturities will be less sensitive to interest rate hikes. A good choice: Vanguard Short-Term Investment Grade (VFSTX), a member of the Kiplinger 25, the list of our favorite no-load funds, yielding 2 percent as of late last year.

Most investors would be caught off-guard by a jump in inflation. Treasury inflation-protected securities deliver an affordable hedge. Buy them from Uncle Sam at treasurydirect.gov. Bargains in municipal bonds could emerge. Kip 25 member Fidelity Intermediate Municipal Income (FLTMX), yielding 1.7 percent, is a good choice. Investors who want to stay flexible can choose Pimco Income (PONDX), a go-anywhere, Kip 25 fund yielding 3.5 percent.

Anne Kates Smith is executive editor at Kiplinger’s Personal Finance magazine.

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