It’s already been a bumpy ride so far in 2015 and with so many retirement savers and investors with fresh capital to put to work, making the right decisions now will have a profound impact on your total return come year-end.
A new year brings about fresh contributions, and at our firm we have just gone through another wave of rebalancing, as investors make their IRA contributions or toggle their funds with required minimum distributions to taxable accounts for reinvestment.
Depending on your personal investment plan, the easy answer is to gingerly spread that capital out among your existing holdings so that you don’t become overweight any particular position or alter your asset allocation. However, we have found that this type of traditional approach in some cases racks up unneeded transaction costs, and in turn doesn’t allow your portfolio to adapt to changing market environments. So instead, it can behoove you to examine the market for relative value, and select sectors or asset classes that present the best entry point and potential for high returns.
The difficult part is uncovering the areas that align with your goals and objectives, while also falling into your general comfort zone. With stocks on their highs, and interest rates on their lows, nothing looks that appealing at first glance. Yet peeling back the surface, it’s easy to see that certain areas of both the equity and fixed-income market are good relative buys for intermediate and long-term investors.
Beginning with fixed-income, high quality Treasury, agency, and corporate bonds are nearing levels not seen since before the 2013 rise in interest rates. So unless you want to relive the events that transpired in the latter half of that year, my advice is to keep your duration low. The other side of the coin looks much more attractive to add to, since credit-sensitive high-yield bonds have underperformed the latter part of 2014 and even into early 2015. Spreads have nearly doubled since their 2014 low, and offer much more relative attractiveness than they did last year at this time.
