This is literally a question we get asked all the time, regardless of the market environment. It is understandable – not all portfolios are created equal regarding entry price and allocation – and people come to us at differing times with new money or cash positions asking what is the best route to take? How can we help get their money working harder? Of course the answer to those questions are very specific to each client but we thought it would be helpful to show an example of an opportunty we are seeing right now in the markets. Something you could possibly adapt to your own personal situation.
Let’s start in the stock market, fresh off its all-time highs. We do see some attractive names, but in general stocks seem fairly priced. In other words there aren’t a lot of great deals to be had. Some? Yes, but not a lot. It rarely does us any good to chase prices. Instead, taking some profits where appropriate, waiting for better pricing on entry and slowly building positions has been our recent approach with equities. That said, we also aren’t feeling any dramatic recession is upon us. How about elevated volatility? Sure, but nothing more than the healthy garden variety type.
Now let’s look at the fixed income side of things. We know bond yields are gradually rising. Remember, when interest rates rise, the price on existing bonds fall. With the FED continuing to increase short-term rates, we know market forces will also gradually increase the yield on the bonds available. This is largely due to supply and demand. Foreign yields are a drag on this at the moment, but eventually longer-term bond yields should rise back toward normal levels. This can cause a decline in the value of your portfolio of existing bonds and leave you with a multi-year underperforming asset. Many investors see this backdrop as a catch-22. But there are creative ways to invest in this environment and we have been successfully using a hybrid approach to boost yields during this time.
Specifically, we see a ton of opportunity in short-term corporate bonds linked to underlying stocks. Because of the structure of the bond this has produced attractive yields with short maturities. Another area is in longer-term bonds that have adjustable rates tied to economic measures such as the consumer price index (inflation) or the difference between say the 30-year treasury rate and the 2-year rate. Take the 30/2 example for instance, since there is virtually no difference currently in the spread, these bonds are being sold at a deep discount. However, if you believe as we do that the yield curve will eventually return to a more normalized level, you could see bonds such as these appreciate in price and produce rising coupons simultaneously. That is a good thing.
Here’s the point of all this. Instead of sitting around fearful of the next bear or trying to perfectly time the markets, there are ways to take advantage of opportunities as they are presented. Currently, it happens to be with some creativity and a hybrid approach to fixed income while maintaining discipline within the equity market.
Ables, Iannone, Moore & Associates, Inc. is a fee-only, SEC registered investment advisory firm providing asset-management to clients in over 20 U.S. states, Europe, Asia and South Africa. We have over 50 years of combined experience in the financial services industry.