WTWA: Current Recommendations for Investors

I try to refresh the concepts and ideas each week, emphasizing the best themes from my reading. My overall recommendations do not change as rapidly – nor should they.  Investors should not be switching around their choices every week.

One of my major themes for the year has been the "great rotation" from bonds to stocks. This has three aspects:

• Bond yields are so low;
• Bond prices have fallen, leading to absolute losses for conservative investors;
• Stocks have surged.

This rotation is just getting started. Our own themes are the same, but I will also do a "year ahead" preview pretty soon.

Here is a summary of our own current recommendations for the individual investor.

• Ignore Headlines. The challenge for investors is to distinguish between the major trends and the short-term uncertainty. The main themes are not related to headlines news, even though sentiment may drive market fluctuations. Do not be seduced by the idea that you can time the market, calling every 10% correction. Many claim this ability, but few have a documented record to prove it. Most who claim past success are using a back-tested model. Please see The Seduction of Market Timing.

• Risk Management. It is far better to manage your risk, specifically considering the role of bonds and the risk of bond mutual funds. As I emphasized, "You need to choose the right level of risk!" Right now, it is the most important question for investors. There is plenty of "headline risk" that may not really translate into lower stock prices. Instead of reacting to news, the long-term investor should emphasize broad themes.
• Bond Funds are Risky. Investors have been surprised at the losses, which will continue as the long end of the interest rate curve moves higher. You need to have the right mix of stocks to benefit from a rising rate environment.
• Stepping in gradually. If you are completely out of the market, you are not alone. Consider buying dividend stocks and selling calls against them. This strategy has been working great both for our clients and for many readers. (Thanks for the email responses!) This will work in a sideways market. You can also buy some stock in the sectors with the best P/E ratios.

Comments

[oldprof]

Jesse - The closed end fund does not really solve the problem. The pool of capital is fixed, but that does not mean that you are holding bonds to maturity as you would do with your own bond ladder. The price of the fund is going to fluctuate with interest rates, so you have no assurance of your exit value. In addition, the fund will trade at a premium or discount to the NAV, and that can also be hard to predict.

Good question -- and thanks.

Jeff

[Jesse Levitt]

Wondering what your thoughts were on CEF Bond Funds as a way to gain long term exposure to bonds with lower risks of the fund having to sell bonds at disadvantageous moments.

[oldprof]

Milk and Honey -- I have actually written quite a bit on this theme. Partly is is what NOT to do -- bond mutual funds, utility stocks, or over-valued names that are trading mostly on yield.

Some ideas of how to play rising rates are part of my 2014 preview -- http://oldprof.typepad.com/a_dash_of_insight/2014/01/2014-investment-preview.html

I hope this helps.

Jeff

[Land of Milk and Honey]

HI Jeff, great information!!

>>"You need to have the right mix of stocks to benefit from a rising rate environment."

Do you have a blog posting about what mix of stocks makes sense in a rising rate environment?

Also, I'm finding I'm thinking in 2-3 months the ending of ZIRP in 2015 will come into market's consciousness... and effect rate-sensitive stocks & I should wait to emphasize buying those. I feel like I'm the only one thinking about this. Am I missing something?

[Dennis Nigrelli]

I enjoyed perspective of Stepping in gradually. I am a new retiree and am setting a goal of 8%+ using a gradual formula.