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Fidelity Viewpoints' five: October 2013

Think about taxes; consumer, tech, health care, and ETF ideas; good news for stocks.

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1. Stocks move past debt deal

The big news this month was the passage of a law extending government funding and suspending the debt ceiling. Federal agencies reopened, with a continuing resolution to fund the government until January 15, 2014. The debt ceiling was also suspended through February 7, 2014.

In the deal’s wake, stocks touched new all-time highs, and there’s reason to think they may continue to rise. The U.S. economy appears to be in a modest but stable mid-cycle expansion, and the very fact that it has been so modest may keep it going for longer than it normally would. This may be a strong reason to maintain or increase allocation to stocks, if you are comfortable with the additional risk of increasing exposure to one asset class.

2. Savvy year-end tax moves

With the debt deal in the rearview mirror—for now—it may be time to start thinking about year-end tax moves to manage your 2013 tax bill. For instance, minimizing exposure to the capital gains tax is even more important for some taxpayers, given the increase in the top rate to 20%, along with the new 3.8% Medicare surtax on net investment income. Taxpayers in the highest income tax bracket could owe as much as 23.8% in tax on their net investment income.

Another way to reduce your taxable income is to give to charity. It could be even more valuable if you donate highly appreciated assets that you have owned for at least a year.

Also, be sure to take your minimum required distribution from your retirement account.

3. Location, location, location

In addition to thinking about managing your taxes, it’s never a bad time to examine your portfolio to see if the investment mix is in line with your long-term goals. Where you locate your investments—meaning the type of account you choose—can make a major difference in how much you can earn, after tax, over time.

Turning to your asset allocation mix, a recent study conducted by three Fidelity analysts shows that investors may be broadly underexposed to Real Estate Investment Trusts (REITs), despite their potential as a strong source of returns and as an excellent portfolio diversifier. Of course, REITs contain their own unique risks that investors should consider.

4. Growth ideas: Consumer, tech, and health care

If the market continues to rally, there might be pockets of opportunities within various industries where growth may be strong, including fast fashion, cloud computing, and biotech. Also, the consumer staples sector—which produces a variety of products that are considered basic necessities—might benefit from millions of people entering the consumer class in emerging markets. Finding growth today could entail a global strategy.

5. Opportunities in ETFs

Exchange-traded funds (ETFs) offer another way to gain exposure to segments of the market. Thus far in 2013, large-cap value ETFs and Japanese stock ETFs have been the most popular. There may be a number of other opportunities in ETFs for investors that are interested in trading ideas, including some with strong recent inflows and those that focus on finding deep value investments.

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