If you were wondering whether the v-shaped or u-shaped recovery debate has been settled, just look at a graph of the S&P 500 as an indication. The recent economic rally has politicians and economists breathing a sigh of relief especially after gross domestic product posted a better than expected 3.5 percent annualized rate. President Barack Obama proclaimed the figures as “affirmation that this recession is abating.”
The abrupt economic growth posted after four quarters of destructive contraction has left retail investors gripping their retirement portfolios white knuckled, hesitant to trust the market. They are baffled with the supposed recovery as they count one in 10 friends out of work and many more on the brink of unemployment.
It is believed that many retail investors caught only a nominal percentage of the recent upside relative to what they captured to the downside in late 2008/early 2009. The misfortune of missing the assumed “recovery rally” has caused apprehension to presently allocate portions of their portfolio to equities. Investor hesitation is evident by observing the remaining cash equivalents on the sidelines and substantial assets flowing from cash to municipal and corporate bonds.
Properly allocating investment portfolios in light of continual low interest rates and a volatile stock market is a quandary that both investors and retirees are battling. Assuming bond net asset inflows continue to rise, investors could be turning the blind eye to substantial interest rate risk influenced by potential future interest rate increases. It may prove wise to play a bit of defense to a bond market that will begin to price in rate increases well before it ever comes to fruition.
If bonds are all you can tolerate investing in at this time, do not underestimate the value of laddering the timeframes of different positions within your portfolio. This will provide continual future cash to reinvest into the possible rising interest rate environment. Purchasing individual investment grade intermediate term or short term corporate and municipal bonds with the intention of holding for the full duration should only be utilized by larger portfolios as diversification, quality and future liquidation become a risk.
Adjustable preferred securities and floating rate notes, mentioned in earlier articles, can provide a bond-like yield with the possibility of holding their value when interest rates are increased. If you have missed the recent rally and time is on your side, dollar cost averaging over the next several months into a diversified allocation of bonds and stocks can be a steadfast strategy to get your confidence back.
Hind sight is 20-20 as we all wish to have shifted our allocation to equities in early March. Do not ignore the possibility of rising interest rates and what it could do to your investment portfolio.
Establishing a game plan with your investment professional to be on the forefront of economic policy may keep you from dwelling on the past.
Griffin Dalrymple, a wealth manager with Opinicus Wealth Management in Palmetto, can be reached at (941) 847-0035, ext. 222.
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