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Balancing against expectations

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By Bob Landaas

None of us have any experience in navigating the waters in the financial markets after the Fed has quadrupled its balance sheet. None of us have gone through tapering. There’s nothing that I can point to that says the last five times I dealt with this, here were the ramifications, and here is the best strategy that we were able to discern.

But let’s consider expectations.

Think about this. At the beginning of the year, the yield on the 10-year Treasury was 3%. The government had not yet commenced tapering. And after almost eight months of tapering, the 10-year is now down to 2.4%. That just flies in the face of what everybody had forecast. And it gives you a sense of the fact that quantitative easing isn’t necessarily propping up the tent. That’s the fear that many of us had.

It’s remarkable that the 10-year is substantially lower now than it was when they started tapering – reducing bond buying – in January.

It’s fair to say, I’m not sticking my neck out here, but later in the fall, when they’re going to be done with the bond buying, it’s going to be hard to imagine a 10-year rate higher than what we even started the year with.

That tells me that quantitative easing hasn’t thoroughly disrupted the fixed-income markets to the extent that some of the doomsayers had projected.

On the equities side, I think two of the biggest issues facing most investors right now are, No. 1, make sure you’re not overexposed to stocks. This is one of our favorite concepts here at this firm: Be properly balanced.

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The markets did really well last year, and they have done OK this year. So, if you’re not careful, you may be overexposed.

I like to draw the line at give-or-take 60%, depending on who you are. If you get much past 60%, you’re primarily increasing the risk, not the return. If you’re not getting paid for the risk, don’t take it.

The second point I’ll make is that last year, growth stocks did better than value stocks. This year, it’s been kind of a horse race. They’re pretty equal, which to me says that you ought to overweight the value stocks a little bit. They’re the slow growers. Everybody’s got to remember that the tortoise won the race, not the hare.

Make slow, steady, methodical progress year-in and year-out, and you’ll do pretty well.

But people tend to forget that when we get good, strong, growth rallies, as we saw late last fall into the early winter, with the social media stocks and the biotech stocks doing extremely well, and then they got hit pretty well late in February.

But the point is you want to make sure that you’re under 60% in stock and that you’re pretty evenly divided between the value and the growth stocks. And if you’re not careful because of last year’s rally, you may be a little overweight in growth stocks and a little bit overweight in stocks in general because of the strong stock market.

Bob Landaas is president of Landaas & Company.

(initially posted Aug. 14, 2014)

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