Weekly Update

The last week of the month was volatile, but the first quarter of 2012 ended with the Dow and S&P posting their best results since 2008, and the NASDAQ championed the finest first quarter performance since 1991. “Risk on” investments prevailed, while safer sectors such as dividend-producing utilities underperformed.

As we enter the second quarter, stay cautious and continue the process of pruning your portfolio in an effort to prepare for the spring and summer months. Cut back a little on sectors that have outperformed the market and rotate into those positions that have lagged the averages. Consider conservative equity positions and reduce exposure to stocks by adding to cash or fixed-income products.

For example, if you hold Apple (AAPL), which gained approximately 50% last quarter, you may want to take some profits, (despite a number of analysts forecasting Apple’s price to reach around $700). Take those profits and invest in less volatile positions such as the iShares Dow Jones Select Dividends Fund (DVY), the Wisdom Tree Dividend Ex-Financials Fund (DTN), Merck & Company (MRK) American Electric Power (AEP) and Kraft (KFT).

As you already know, Apple has been my largest holding for several years and as of this writing, I have not pulled the trigger on the global tech giant. However, my weapon is loaded and my finger is on the trigger. If (or should I say when) I do pull the trigger, I will sell from 25% to 50% of my position.

Is it ever a mistake to take profits? The simple answer is no.

In response to several questions as to whether this is an appropriate time to buy a short position as a defensive measure, it is probably “yes” if (and only if) you have a very high risk-tolerance level. If you do short the market, consider utilizing the ProShares Short S&P 500.

This upcoming week will cause a significant level of nail biting. The market driver to watch will be the March jobs report. Traders will also focus on construction, manufacturing, factory orders, and an earnings report from used car dealer, Carmax, which will provide a gauge on the impact of increased gasoline prices. A disappointing jobs report and/or poor results from Carmax could result in a very volatile week ahead. However, on a positive note, I remember recently reading that when major indexes post a 10% or better return in the first quarter, the average annual return for that year is approximately 16%.

An interesting strategy for Baby Boomers to increase yield and create a tax benefit is to include a Master Limited Partnership (MLP) in a portfolio. The following MLPs build and operate oil and gas pipelines in the U.S. and Canada, and typically carry a 5% to 7% yield. (Dividends are treated as a return on capital, thus not triggering a tax event.)  Consider purchasing individual positions in Kinder Morgan Energy Partners (KMP, 5.6% dividend yield) or Energy Transfer Partners (ETP, 7.6% dividend yield). Also, consider the ALPS Alerian MLP ETF (AMLP, 5.86% dividend yield) or the new Yorkville High Income MLP ETF (YMLP). The benefit of the two exchange traded funds (ETFs) is diversification into the approximately 100 MLPs, and they do not require filing a K1 with your tax returns. MLPs are great sources of income, but they are complicated investment vehicles that require analysis prior to purchase.

I’ve included a snapshot of the three portfolios that have been published in my update for you to review. As you can see, a higher standard deviation will typically result in a greater return in a rally or a larger potential loss in a down market. Also, an increased concentration in “risk on” holdings, such as Guggenheim S&P Midcap Pure Growth (RFG), can dramatically increase gains or, of course, losses.

Portfolios #1 and #2 below are designed to be conservative with low volatility and have utilized high dividend-paying funds as an alternative to fixed-income securities. The third investment chart is Marea’s IRA, which is a growth portfolio that does not have a significant level of beta (volatility) based on the portfolio’s standard deviation as it compares to the S&P.

The performance winner in my group is colleague Doug Woods (Bennington Asset Management), who generated a 14.58% return in a growth portfolio of Exchange Traded Funds and individual stocks that include the Wisdom Tree Dividend Ex-Financials Fund (DTN), Alcatel-Lucent (ALU), and EMC (EMC).

Conservative Portfolio #1

Asset allocation: 50% equity, 40% fixed income, 10% cash

Conservative Portfolio #2

Asset allocation: 55% equity, 40% fixed income, 5% cash

Marea’s IRA

Asset allocation: 86% equity, 7% fixed income, 7% cash