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Equity investors nervous, bond investors euphoric

The first correction of more than 10 percent for major stock indexes since the recovery began in March of 2009 seems to have set investors on edge. Who can blame them? After the worst stock market decline in more than 80 years capped off the worst real estate collapse in about the same period, and resulted in most investors in the stock market being lucky to break even in the last 10 years, we could say that enough is enough.

The recovery in 2009 for both stock and bond prices was providing some hope, then just as the average individual was starting to think about getting back in the game we get hit with a “flash crash,” worries about the Eurozone’s fiscal problems, the worst environmental disaster to occur on U.S. shores and an on-going circus in Washington that just won’t quit. When chatting with friends and clients, I sense that many have a feeling of little hope for things to get better, and I find I have less energy to try to explain why things will. We’re all just worn out.

As I write this article in the closing days of June, the S&P 500 Index is down about 13 percent from its recovery high set in late April. Investors in bonds have been spared the bulk of this pain with some types of bonds setting new high prices in recent days.

Is hope lost? Should investors continue to hunker down, seeking safety, even if it means very low returns? History has a different suggestion for those willing to break from the crowd, look past this period of volatility, which will likely continue for a while. For those who can adopt a disciplined approach to managing their investment portfolio and not be subject to the fear created by not having exact answers about what the future holds, these periods of time present opportunity.

History shows the majority of individual investors are wrong at major market turning points. Current negative sentiment should be taken as a sign of good things to come, given enough patience to let the plan play out. A poll of investors earlier in 2010 asked them how the market performed in 2009. Surprisingly, the majority answered that the market declined in 2009, even though the S&P 500 Index gained over 26 percent for the year — an above average performance.

I suspect many of these investors sold out early in the year after the long, torturous decline which began in 2008, and never looked back to see what really happened. That 26 percent gain came with almost zero participation from individual investors as measured by flows into equity mutual funds. What were these investors buying? They placed more than $230 billion into bond funds in 2009, and continue to do so today. But, with interest rates at all time lows, the potential for bonds to provide a repeat performance is limited in the next few years.

There’s nothing wrong with owning bonds in proper proportion, just like your portfolio has a proper proportion for equity exposure. My suggestion, make sure you’re ready for the next leg of the bull market in stocks, with a common sense allocation in your portfolio. Which side of the crowd do you want to be on?

Tom Breiter, president of Breiter Capital Management, Inc., a registered investment adviser. He can be reached at (941) 778-1900 or by e-mail at tom@breitercapital.com

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