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Strategy of dealing with long term interest rates starting to rise
With many of us holding significant portions of our portfolio in pure bond funds or balanced funds how are investors responding with change in portfolio and altering specific bond funds. It appears that some are tending to add more funds with Hi Yld bonds and floating interest rate bonds.
With the forecast of rising interest rates I began to reduce my allocation to fixed income back in October of 2010. I know, you are thinking kind of early … Well, not really … and, here is why. As bond prices began to pull back stock prices were moving upward so I reduced my allocation to bonds form 30% to 25% and raised my allocation to good dividend paying stocks and funds of same by a like amount. I actually increased the income stream during the process and I have had capital appreciation on the investment move. So that was indeed a good move from my thoughts.
Now, I know that one needs to maintain some bonds within their portfolio for diversification and with this I am presently about 25% income. To reduce my allocation to 20% and raise cash by a like amount means I have some dead money form a yield generation perspective and more cash than I need to move into and out of for special strategy investments form time to time. In addition, I have been reducing my allocation to equities because I feel they have gotten ahead of themselves and are scheduled for a pull back. With this, I am awaiting their pull back and when this occurs perhaps bond valuations will increase as investors leave stocks and move to bonds. I will be doing just the opposite … I’ll reduce my allocation to bonds and move the money to good dividend paying stocks, perhaps some commodity funds too, while keeping my cash allocation at its current level.
Presently, I am 20% cash, 25% income and 55% equity and other. I just don’t see me drawing my bond allocation back of 20% nor do I see me raising my allocation to equities and other to more than 65%.
Some might have a different strategy … but, for now, the above is my game plan to deal with rising rates and a stock market pull back.
A simple ... but, likely an effective strategy ... or at least, it has been in the past on more than one occassion.
I have recently adjusted the income part of my 401k. I sold off most of my total return bond fund, MWTRX, and also sold all of my HSTRX fund which holds a large percentage in treasuries. I put the money into 3 funds that have greater flexibility and diversification for income. I purchased PGDPX and RPSIX, and just started last week buying into MAINX. I continue to hold LSBRX in this space also.
I should add that by making these changes I probably added some risk and volatility going foreward. Good luck to you.
I continue to buy alternatives, adding to Marketfield (MFLDX) and to Brevan Howard Macro (hedge fund available on London exchange, although USD$ shares are available on the pink sheets.)
With the aim of adding diversity to my dividend portfolio, and reviewing the latest "Harry Domash Dividend Detective"issue, I purchased AWF Alliance Bernstein Global High Yield income. It traded at a very small premium when I made the puchase. It distributes close to 8% and has minimal leverage. It does have more risk because it is a junk bond fund but it holds many many issues and does hedge some of the portfolio. The management seems strong and seasoned. The swinging of the discount and premium status somehow intrigues me for a long time hold because as I do with other such CEF's I try to put a low ball bid to try and catch a better buy. These funds are ones I plan to hold for long term. I think they are alternative to the usual bonds that I hold mostly in balanced funds and some pure bonds. The high yld funds will perform more like equities in a rising rate environment.
Comments
http://mutualfunds.about.com/od/wheretoinvest/a/Best-Bond-Funds-For-Rising-Interest-Rates.htm
Fund Picks for a Rising-Rate Environment
http://www.morningstar.com/cover/videocenter.aspx?id=369122
Bond strategies for a rising rate environment
http://blogs.reuters.com/reuters-money/2011/02/28/bond-strategies-for-a-rising-rate-environment/
Rising Interest Rates Are on the Way. Here's How to Protect Your Portfolio:
http://seekingalpha.com/article/283505-rising-interest-rates-are-on-the-way-here-s-how-to-protect-your-portfolio
With the forecast of rising interest rates I began to reduce my allocation to fixed income back in October of 2010. I know, you are thinking kind of early … Well, not really … and, here is why. As bond prices began to pull back stock prices were moving upward so I reduced my allocation to bonds form 30% to 25% and raised my allocation to good dividend paying stocks and funds of same by a like amount. I actually increased the income stream during the process and I have had capital appreciation on the investment move. So that was indeed a good move from my thoughts.
Now, I know that one needs to maintain some bonds within their portfolio for diversification and with this I am presently about 25% income. To reduce my allocation to 20% and raise cash by a like amount means I have some dead money form a yield generation perspective and more cash than I need to move into and out of for special strategy investments form time to time. In addition, I have been reducing my allocation to equities because I feel they have gotten ahead of themselves and are scheduled for a pull back. With this, I am awaiting their pull back and when this occurs perhaps bond valuations will increase as investors leave stocks and move to bonds. I will be doing just the opposite … I’ll reduce my allocation to bonds and move the money to good dividend paying stocks, perhaps some commodity funds too, while keeping my cash allocation at its current level.
Presently, I am 20% cash, 25% income and 55% equity and other. I just don’t see me drawing my bond allocation back of 20% nor do I see me raising my allocation to equities and other to more than 65%.
Some might have a different strategy … but, for now, the above is my game plan to deal with rising rates and a stock market pull back.
A simple ... but, likely an effective strategy ... or at least, it has been in the past on more than one occassion.
Good Investing,
Skeeter
I should add that by making these changes I probably added some risk and volatility going foreward. Good luck to you.
With the aim of adding diversity to my dividend portfolio, and reviewing the latest
"Harry Domash Dividend Detective"issue, I purchased AWF Alliance Bernstein Global High Yield income. It traded at a very small premium when I made the puchase. It distributes close to 8% and has minimal leverage. It does have more risk because it is a junk bond fund but it holds many many issues and does hedge some of the portfolio. The management seems strong and seasoned. The swinging of the discount and premium status somehow intrigues me for a long time hold because as I do with other such CEF's I try to put a low ball bid to try and catch a better buy.
These funds are ones I plan to hold for long term. I think they are alternative to the usual bonds that I hold mostly in balanced funds and some pure bonds.
The high yld funds will perform more like equities in a rising rate environment.
prinx