Welcome to today's live chat about the current market climate.
We have three members of Kiplinger's investing team joining us today: Manny Schiffres, Jeffrey Kosnett and Anne Kates Smith.
Hi everyone, happy to be here!
Let's start with a question that I'm sure is on everyone's mind.
How can investors cope with all the uncertainty surrounding Europe and Greece?
By asking another question: When is anything "certain?" Answer. Never. So don't do stuff that doesn't make sense. If you're taking too much risk, well, you are no matter what the Europeans do, so trim it... and extend that logic elsewhere.
This market has been particularly focused on headline news coming out of Europe. And I can almost guarantee that in a few months, all eyes will be focused on Washington, where lawmakers will be dealing with the so-called fiscal cliff. This is a time to remind yourself that when you invest in stocks you're a business owner--stop thinking like a stock trader.
I think volatility is with us to stay, for a number of reasons. If you're going to try to get stock-market returns, which over the long haul, should be better than what you get from bonds, you'll just have to have a strong stomach. My personal strategy is to never (or rarely) look at my portfolio during downturns. It helps prevent me from making bad decisions at inopportune moments. Remember, investing is as much about psychology as it is about fundamentals
So the moral of the story is to sit tight.
Let's start with our first question from Mark.
Also, don't obsess on the news. Last Friday, when the market sank, it was all over the news all weekend. Yesterday's recovery didn't even make the front page today of the Washington Post, so there's a bias towards negativity that won't quit.
Mark, can you be a little more specific? Are you looking at emerging markets? Bond funds? Etc?
Do you need income or is it enough to put this money away and keep it as safe as possible?
Mark, the answer usually has to do with time horizon and your ability to tolerate risk and volatility. Plus, it has to do with the rest of your portfolio. If you have 100% of your assets in bonds and T bills, put the lump sum in stocks; if you have 100% of your money in stocks, take a safer route. In general, we like big blue chip dividend paying stocks and higher-yielding bonds that don't have the word Treasury in their name
Here's a follow-up from Mark
Sounds like some good dividend stocks and funds, including utilities, would serve you well because small-caps probably don't give much dividend yield or dividend growth.
I think 65% in bonds is pretty conservative. You might consider upping the stock allocation, though again it depends a lot on your tolerance for volatility
Traditional regulated electric companies, a water system or two, and some Verizon and/or AT&T. You'll get 4-5% this way.
AT&T and VZ showed their defensive characteristics during the May selloff
Alright, let's move on to our next question from Larry
We like big, blue chip stocks better than small at the moment--with strong balance sheets, lots of cash and generous dividends. If you want to tilt conservative, think of stocks we consider 'sleep tight' stocks, such as Coca Cola, P&G, J&J, et.
Just a heads up for those of you who are joining us for the first time. Your questions will be submitted and held for moderation. Depending on the volume and complexity of reader comments, your question may not necessarily be approved right away. However, we will do our best to answer your question as quickly and thoroughly as possible!
Larry, it's more like income than securities. If you are simply replacing your salary with the pension, don't count it towards your asset allocation. If you're getting another job and also the pension checks, then it's a bond for sure though with no risk to principal.
I'll add another factor in favor of our sleep-tight stocks--they're less volatile than the market overall, so if you can't stand the daily gyrations, these stocks will cushion that a little.
Alright, our next question is from Bernie. Looks like he's looking to minimize risk.
Bernie, can you tell us a little more about your current asset allocation?
Thanks, Anne. Definitely a good option for many of our readers.
While we wait to hear from Bernie, let's move on to our next question from Jackie.
I happen to have on my desk an up-to-date version of a "risk pyramid." It shows the current yield on various kinds of bonds and bond substitutes starting with no-risk stuff and climbing progressively toward higher yield instruments. It starts with money-market funds, which essentially yield zero, includes Ginnie Maes at 2.1%; single-A corporate bonds at 3.1%, emerging markets bonds at 5.9%, energy partnership at 6.5% and concludes at the very top with junk bonds at 8.1%. These figures are averages, of course, and just deal with yields before expenses. You do have some risk of principal loss.