January 31, 2011

Investment Options for 2011

In case you missed it, 2010 was another great investment year. The S&P 500 finished its second consecutive year with double digits gains increasing by 15.06% after being up 26.46% in 2009. The Dow Jones Industrial Average (DJIA) also had a very good 2010, and it has gained more than 80% off its March 2009 lows. These are some very impressive numbers, but what should you do now?

Well, if the last few years have not shown you that you should be invested and diversify, then I probably cannot sway you anyway. For those that do listen though...

"It is definitely hard to see what areas of the market will stage the best performance, so since almost all of you seldom make changes to your portfolios, you must continue to diversify your portfolio - if nothing else, rebalance from last year!" - January 2010

Yes, I said that last year, and I completely agree again. When you rebalance, you take money from your winners, and redistribute it across your portfolio. The winners give some money to the laggards, but your portfolio will get back to that target allocation that you set (hopefully, you have a financial adviser that is helping you make plans). Do not simply pile in to last year's winners, and hope for a repeat performance.

I have received a few emails asking about bonds and interest rates, and it should become an issue late this year or early next year. Essentially, why would someone buy a 30-year treasury bond at 4.5% or a 10 year note at 3.3% when they can buy the same things in a short period of time with a higher yield? With this in mind, I would suggest to look to other areas of fixed income for your allocation. Essentially, you want to try to limit the interest rate sensitive bonds in your portfolio if possible. A core/total bond fund, high yield bond fund, and an international bond fund should most likely all fare better than a US government bond fund this year.

For those that continue to complain about CD rates, I am sorry, but you are in for another year of pain. The Federal Reserve will most likely not raise rates until the end of the year or early next year, so money market rates and CD rates will stay extremely low.

As for the equity holdings, I have preached and preached about diversification and about my favorite area - mid caps. Make sure you have a good mix of large caps, mid caps, small caps, and international holdings in your 403(b)/457 accounts - and understand what those allocations should be.

Finally, I cannot stress enough the importance of research and seeking qualified advice. When I manage money for my clients, I look at what has changed in the market, economy, and with them. I may make numerous trades in a year or just a few, but there is always a reason behind it. I have read a number of emails that point to parents, neighbors, friends, and/or colleagues as sources of advice and information. While I am sure that all of these people mean well, the vast majority most likely do not have the experience or knowledge to really guide you through to retirement and beyond. Would you go to your bank for medical advice? So why go to your neighbor for financial advice? Find a qualified professional to help you set goals, allocations, and understand your retirement.

For 2011, Wall Street analysts are forecasting another good year in the stock market as the economy continues to improve, and I know we would all like to see continued improvement and positive returns.


Looking for the Best CD Rates said...

While I think I agree with you, the low CD rates are really hurting some people - especially those who need some security in their investing. Bonds don't seem to be much better. Is there a particular sector of the market you might consider less dangerous than others - how about blue chips?

Robert (Robby) E. Schultz III, CFP®, ChFC®, CPWA® said...

Thanks for reading the blog and for your comment/question.

I agree that the low CD rates are indeed hurting some people, but unfortunately, no one ever said it would be easy. It used to be that money markets and CDs were easy money, but that is not the case anymore.

Most blue chips do have a dividend with a decent yield, but there is not much "security" because the underlying stock could fall. Blue chips "should" do well, but the lack of security is an issue.

Most of the bond funds that deal with high yield bonds will have a fairly good yield. For example, Pimco High Yield (7.62%), Janus High Yield (7.45%), and Fidelity High Income (7.18%) all have good yields (and are no-load), but there is a bit of risk there too. The risk they face is a default risk, but if the economy continues to grow, the default risk for each should continue to fall.

Once again, a good financial adviser should be able to point you to some other options than just CDs or even the fixed rate annuities after reviewing your personal situation.

Thanks again for your question.