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Now Is A Great Time To Be Talking About Rebalancing Your Portfolio (The Wall Street Journal)
“We’re in the middle phase of a long-term bull market in which stock returns have been incredibly high, and bond returns slightly negative,” writes John Rafal of Connecticut-based Essex Financial Services in a new WSJ column. This is a good time for advisors to talk to clients about rebalancing their portfolios.
“If a client is overweight in stocks, I suggest repositioning those assets into one of three categories of fixed income. Category one is the safest: bonds with short-term maturities and durations. Category two is what I call “strategic income”: a mix of high yield, floating rate, lower quality corporate, and agency bonds, mortgage-backed securities, and a diversified mix of income. You could add in some equities with high yields like preferred stocks, convertible bonds, and master limited partnerships. The third, and riskiest, category contains alternatives like managed futures and long-short equities.”
“If 2013 was a year of economic softness and equity market strength, via substantial P/E multiple expansion, it stands to reason that 2014 could end up being the exact opposite — an accelerating economy and a challenging investment year,” writes Gluskin Sheff’s David Rosenberg in his latest note. But economic growth is only part of the picture. Sentiment is very high, and with the VIX at 12 it suggests some complacency. Valuations are “richly priced” though not “bubbly.”
And going into Q4 “the big bet here is on further significant margin expansion to carry the day,” he writes. “Indeed for 2014 as a whole, the bottom-up consensus view is that we will see 10% EPS growth with just 4% sales growth. It’s not impossible, but is still enough of a disconnect to make me a tad uncomfortable using it as a base-case scenario.”
Investors are focusing too much on liquid assets and this is hurting their long-term returns, according to a new outlook published by Citi Private Bank. “Have investors raised their risk tolerance too much while reducing their liquidity preference too little?” the report co-authored by Global Chief Investment Strategist Steven Wieting and others asked. “The value of select less-liquid investments may be underestimated.”
“With higher potential returns, greater control, and the ability to participate in strategies unavailable in public markets, illiquid investments can potentially offer a premium to liquid investments and add material value to a balanced portfolio, especially when consistently implemented,” they added. Private equity and real estate are expected to offer an annualized return of 11.9% over the next 10 years. This compares with 3.4% projected returns for developed market corporate credit and 6.7% for developed market large-cap stocks over the same period.
Goldman Sachs’ Sharmin Mossavar-Rahmani and Brett Nelson are recommending that the firm’s private wealth clients “stay fully invested at their strategic allocation to U.S. equities.” Despite recent chatter of a stock market bubble Mossavar-Rahmani and Nelson don’t see a bubble.
“We believe that having a long-term investment horizon is particularly important at this time because it gives our clients a comparative advantage over other investors whose investment horizons are hampered by institutional constraints such as quarterly reporting periods or public finance considerations,” Mossavar-Rahmani and Nelson write. “In addition, the current monetary policy environment of zero interest rates makes cash and high-quality fixed income assets much less attractive over the next one and five years, which, in turn, increases the attractiveness of equities.”
One of the arguments in favour of index mutual funds is their low fee, compared with the fees charged by hedge funds. The latter charge 2% and typically take another 20% of profits. But Morgan Stanley’s Adam Parker points out that “hedge funds in aggregate are essentially long the S&P 500.” This chart shows the correlation between the S&P 500 and a broad equity hedge fund index. A correlation of 1 suggests the two are in sync.
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