Is it Time to Wade Out of the Shallow End of the Pool?

With all the volatility in the market, many investors have been clinging to safety just like when you were a kid swimming in the shallow end of the pool.  So, how do you know when it’s time to put on your floaties and wade towards deeper water? Let’s take a hypothetical client and look at his situation. Assume his investments are divided into two buckets, each yielding on or around 4%.  Bucket One contains an allocation of defensive positions which contain concentrations in areas of high quality corporate bonds, government securities, Treasury Inflation-Protected Securities (TIPS), and high yield bonds.  Bucket Two contains an allocation of large capitalized multinational revenue companies that pay dividends.

The client’s goal and my goal for this year is to grow the portfolio, while not taking undue risk.  Plus, the client is taking income from the account, and we’d like to cover that income with yield.

Question:   Can bonds go up in value, that is, have capital appreciation?   Answer:  Yes, when interest rates are lowered and/or there is a panic in the streets and there is a flight to safety.  Forget the panic discussion for now.  Let’s focus on Bucket One and interest rates.  If bonds can add capital value by the Federal Reserve lowering interest rates, do you think that will occur in 2012?  We think the answer is no.  Why?  Because rates are already low.  So, Bucket One, which seeks to provide the stability we want, is in the position to provide, as of now, the 4% yield for this year.

Let’s look at Bucket Two, with large company equities that pay dividends.  Here we have an asset class that has the potential to pay the same yield as the bonds, PLUS have the opportunity for appreciation.  If the appreciation occurs this year, then we have a bucket that has the potential to produce a greater rate of return.  BUT, with that opportunity comes added risk.  Herein lays the decision for each of us.  Are you comfortable with the bond yield or do you want to have the potential for a little more growth?

We have been advising our clients, based on their individual situations, over the last six months to slowly add to Bucket Two.  We are continuing to slowly add to it and we believe that without some unforeseen geopolitical event occurring this is a move which should be considered.

It is time to begin to wade out of the shallow end toward a little deeper water. We’ll keep our feet on the bottom and our floaties securely on our arms, but let’s consider getting the lower end of our trunks wet!

Oh, yes, there is another bucket appearing we are watching.  It is the Growth Bucket.  Keep your ears and eyes open for that, and as always we are happy to sit down with you to discuss your personal situation and the best balance for your buckets.    Happy swimming!

*There is no assurance that the techniques and strategies discussed would be suitable for all investors or will yield positive outcomes. This is a hypothetical example and is not representative of any specific situation.  Your results will vary.  The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.  There is not guarantee a 4% rate of return will be attained.

*Bonds are subject to market and interest rate risk if sold prior to maturity.  Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

*The opinions voiced in this material are for general information only and are not intended to prove specific advice or recommendations for any individual.  To determine which investments(s) may be appropriate for you, consult your financial advisor prior to investing.  Securities provided through LPL Financial.  Member FINRA/SIPC.