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Investment Change: 2014 Q2

Posted by kdadmin on June 9th, 2014.

I think we’ve milked high yield bonds for about as long as I’d like. More and more the phrase, “Pigs get fed, hogs get slaughtered,” echoes in my mind.

As such, we’re out. Also, though the return on our mix of small cap investments has averaged nearly 20% in the last year, we’re going to significantly lighten our stake.

For our clients: Changes have already been made to your advisory accounts. If necessary, Terry will be contacting you to make changes to your 401k’s, and/or outside accounts.

For those who aren’t our clients: Maybe it’s time to become one.

High Yield Bonds. Lending rates are down, yield spreads are tightening, and there has been a flush of money buying up ETF’s in a search for yield. Projections from our research firm show an accelerated increase in the yield of investment grade bonds which doesn’t bode well for the capital value of high yield bonds. While high yields may have a bit higher up to go, appreciation wise, we’ve done very well over the last few years, with much lower risk than the general market. We knew this gravy train would end. We’d rather take our winnings and go home. For a wonderful primer, and quick education on high yield bonds, click here.

Small Cap. Though small cap funds have been beaten around these past few months, many have recovered nearly all of their short term loss, and are still up 20+% for the trailing 1 year. Still, small caps can be much more sensitive to choppy summer markets, as well as more vulnerable to changes in federal policy. It’s likely that small caps will continue to do well, which is why we still have some exposure to them. However, small caps can be an aggressive play in all but the most beaten up markets. Since the general economy and markets are looking up, small cap’s potential volatility is getting a little too rich for our blood. We prefer to bank some of our profits. As such, we’ve cut our exposure by nearly half.

Going Forward. We’re not in any rush to buy back into the market at its all time record high; especially at the front end of a traditionally choppy summertime market. We think the remaining holdings will offer a nice foundation for future investments; when prices are a bit more reasonable …

For a technical commentary on The Summertime Blues, click here.


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