Spring back. Fall forward.
I know. I know. It’s the opposite; however, investors have a propensity to follow the old aphorism to “sell in May and come back in October.” Last year’s spring/summer decline began at the end of April and markets just recently recovered those losses, so that approach may be worth considering, especially if last week is any indication of what’s to come.
The Dow posted a loss of 1.15%, the worst weekly decline of 2012. Investors were preoccupied with a slowdown in China, Portugal’s debt issues, and mixed economic results at home, which all led to profit taking.
Has the market reached its 2012 peak? Let’s perform a quick analysis from both bull’s and bear’s perspectives.
Bulls have concluded that the market is under priced because of a Price-to-Earnings (P/E) Ratio of 13, versus an historical average of approximately 15.5. Also, as bond yields continue to rise, more capital will be invested in equity markets supported by a recovering U.S. economy, thus moving major averages to new highs.
Alternatively, bears assume the market will take a breather because Europe is in a recession, the Chinese economy has perceptibly slowed down, and equities have had their best start in over a decade.
At this point in the annual cycle, I want to shelter year-to-date gains while also participating in a further move to the upside. However, we can’t have it both ways. As I mentioned last week, downside risk can be minimized by simply increasing your allocation to cash, fixed income, and rotating into dividend producing equities.
Consider the game plan outlined in the following paragraphs.
First and most importantly: reduce exposure to growth positions. Growth positions may be mutual funds that carry the word “growth” in their titles or descriptions, sectors such as technology, or high-flying stocks such as Chipotle. Additionally, cut back on broad indexes, including small caps and mid caps, as well as the Dow industrials and S&P 500. (Note that mutual funds referred to as “large blend” or “growth and income” target the S&P, and investments referred to as “large value” or “equity income” mirror the Dow industrials.)
Next, increase exposure to a money market fund and bond positions, including iShares Barclays Aggregate Bond Fund (AGG), the Vanguard Short-Term Bond Fund (BSV) or the iShares Lehman Intermediate Credit Bond Fund. On the fixed income side, steer away from long-term bonds.
Another option is to assess insurance products, which include fixed, immediate, index, or variable annuities. Many annuities offer a level of principal guarantee, and they are popular as retirement savings vehicles or means to save for specific goals, such as paying for out-of-pocket healthcare expenses. I’ve included a recently published annuity article titled “Annuities Cure Asset Loss From Health Expenses” written for financial advisors for you to review. (Check put the link on page 42: http://www.insurancenewsnetmagazine.com/march12/.)
Finally, you may rotate into equity positions primarily offering dividends. Firms to consider include Abbott Labs (ABT, 3.38% dividend yield), Merck & Company (MRK, 4.42% dividend yield) American Electric Power (AEP, 4.89% dividend yield), Consolidated Edison (ED, 4.24% dividend yield), General Electric (GE, 3.44% dividend yield), Siemens (SI, 3.8% dividend yield), Kellogg Company (K, 3.28% dividend yield) and Kraft (KFT, 3.03% dividend yield). Exchange Traded Funds I recommend include iShares Dow Jones Select Dividends Fund (DVY, 3.07% dividend yield) and the Wisdom Tree Dividend Ex-Financials Fund (DTN, 3.02% dividend yield).
Over the past couple of weeks, I added to cash and increased my exposure to dividend payers, and only lost 0.2% last week (not bad for a growth portfolio). A small reduction in positions that have performed well over the last six months can potentially make a significant difference in your year-end returns.
Have a productive week.