INVESTORS CORNER:

Yet another opportunity to venture beyond our comfort zone

by Linda Postorivo

Remember the good old days? Investors were divided into two groups: owners and lenders.

Owners were the more aggressive lot; wanting to make a return on their investment through purchasing stock, holding it while it appreciates, and then selling it at a gain. (Buy low/sell high)

Lenders, on the other hand, were much more conservative. They wanted to allow someone else to use their capital, in return for a stated rate of return (and as many guarantees as possible).

In addition, these two basic types of instruments generally moved in opposite directions. When stocks went up, bonds went down. It wasn't really rocket science and they each took their turn in the barrel over various market cycles. But, by structuring a portfolio of both stocks and bonds, you were fairly certain to always have something performing well. And so... asset allocation was born.

Our focus at this time, is on the 'safe' investment option: THE BOND (shaken not stirred). The instrument of choice in times of trouble. Remember 2008? Thank goodness we were all able to cash out of equities (at a loss) and run to the safety of money markets (forget about breaking the bank). Who really believed they weren't guaranteed? We still had the safety of treasuries, backed by the full faith and credit of the U.S. government (forget about the downgrading of our debt). So, let's all sit in our safe fixed income world and wait until the equity markets are at an all-time high, before we venture back in. (Buy high/sell low???)

The first half of 2013 saw the U.S. economy and our equity markets continue to shine. Then, on June 18th, just before the close of Q2, Mr. Bernanke testified to the Joint Economic Committee of Congress, stating that "If we see continued improvement and we have confidence that that's going to be sustained, then we could in the next few meetings..take a step down in our pace of purchases" (aka tapering!). Let me make sure I understand what he really meant. The financial markets will have to subsist without this artificial lifeline?

So if the Fed sees economic fundamentals improving, why then did this simple statement send the fixed income markets into such a turmoil? Luckily this havoc lasted only a few days. Mr. B quickly explained that this tapering process would be handled with extreme care over time. And all was right with the world again. Interestingly, the aggressive equity markets rebounded quickly, a mere bump in the road. The safe fixed income markets, however, underwent a "sea change." The realization that interest rate movements have a dramatic effect on portfolio values has shaken investor confidence and reset rate expectations.

Perhaps we should all look at tapering as what it is, a sign of a robust U.S. economy and an opportunity to venture beyond our comfort zone. We continue to subscribe to the theory of creating a plan, working with world-class managers and keeping your eye on the ball.