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When Investing Right Goes Oh So Wrong

With the recent news and market movements, Brian and Bo share with you their views about investing. They look into asset classes from Fixed Income to Emerging Markets, sharing a lot of great advice about allocating your portfolio going forward.

  • The FED, the ECB, and Bank of Japan have been dumping enormous amounts of money into their respective markets, to spur economic growth.
    • Fed plans to start tapering 85 billion a month in bond purchases if the unemployment rate could get below 7%
      • U.S. Treasury was at 1.6 beginning of May, by the end 2.6 at the end of June.
      • Do not be surprised if an asset class like Bonds will have a little jump after the initial shock settles from the Chairman’s remarks.
  • We want you to know how to prepare, or talk to your advisor about, your portfolio.
    • Fixed Income:A few months ago Warren Buffet said to get out of long term bonds. He’s right, but, we don’t know too many individual investors (if any) that are looking to buy a 30 year bond.
      • Over the past 30 years we have seen a bull market in the bond market place, meaning that interest rates are falling and bond prices are rising. That may not be the case anymore; interest rates seem to be going up.
      • Why this is important: there is an inverse relationship with interest rates and principal when dealing with bonds. So as interest rates rise, bond prices are falling.
  • What are the risks associated with the changing interest rate environment?
    • Important measures to look at:
      • Duration- measures the change in the price of a bond- given a 1% change in interest rate.
      • If you are entering into a rising rate period it is best to invest in bond funds with low duration, which essentially means that you are investing in shorter term bonds with higher coupon payments
      • Be aware that Bonds do not go to zero like stocks can, also, beware of trading based off of momentum.
      • Why not buy and hold bonds? 10 year notes are currently paying 2.5%, that’s not enough to bet the farm on, so diversify with some short and medium term bond holdings.
  • An important point to consider is to have different strategies not only across asset classes but also within each asset class (Value, Growth, Blend, Foreign, Domestic, Large, Mid, Small).
  • U.S. Stock Market: Has been on the up and up, and it was expected. Asset classes that make runs or slumps for extended periods of time are always expected to outperform its average for a period following.
  • International: We think that going forward over the next 10 years the international market is the place to be, because of rising middle classes worldwide. That’s not telling you to throw all your money overseas, make it a satellite holding and use it as a good way to diversify.
  • The top performers of the past few years do not guarantee who the top performers will be in the coming years. Being diversified is not going to beat the top performer but will not lose as much as the worst performer. Instead of trying to outperform a benchmark, compare your specific asset class performance with the respective index.

For a great resource for historic returns across different asset classes jump over to Google and search: Periodic Table of Investment Returns

“If you are not confused about the economy, you don’t understand it very well” – Charlie Munger

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