December 8, 2022

  • The Federal Reserve raised interest rates by another 75 basis points, bringing the fed funds rate above 2.5%.
  • August CPI came in at 8.3% y/y.
  • Three investment experts say bonds, CDs, and dividend-paying stocks are good portfolio adjustments.

It is not news that the economy has entered a phase of slow growth and rising rates.

On Wednesday, the Federal Open Market Committee raised interest rates by another 0.75 basis points, taking the overall rate above 2.5%. The newly projected federal funds rate is 4.4% for 2023 and 2024.

Meanwhile, the August CPI, a measure of the change in the prices of goods and services overtime, came in at 8.3% year over year.

During a panel discussion hosted by Investopedia on Tuesday, Kristen Benz, director of personal finance at Morningstar, noted that most fund managers have not seen these economic conditions during their careers.

She added that the closest time period that parallels this environment is the 1970s, when high inflation was accompanied by high interest rates, causing stocks and bonds to fall simultaneously.

In response, investors tend to make a fatal mistake when trying to adjust their portfolios with an economic downturn: They look at what has been doing well lately, said John Rachenthaler, vice president of research at Morningstar.

“I had quite a few people texting me in April, May, and June to talk about goods and boxes of goods [and] Should I have more items in my wallet? “

He continued: “In this case at least, there was definitely an element of closing the barn door after the animals came out because I looked for it and the commodity index has fallen 15% since mid-June, which would be unpleasant if someone went there in mid-June to protect against rising inflation. He might even sell assets that have already lost money.”

Benz noted that Morningstar has reams of data that show investors often undermine their investment success by chasing what has recently outperformed.

The best thing you can do, Rekenthaler noted, is to look at what you already have in your wallet and move toward the things that have been hit the most. He added that one example could be high-yield bonds.

Benz acknowledged that bonds provided a good cushion to offset stock losses during previous bear markets. She acknowledged that what worries them this time is the fixed income portion of investors’ portfolios.

However, there are alternatives, says Anastasia Amoroso, managing director and senior investment analyst at iCapita. It specifically refers to From one to three months Certificates of Deposit (CDs) that offer rates of return not seen since 2005. Additionally, US Treasuries yield 4% over one to three year periods. She noted that in the credit risk range, where the risk increases, you can get returns of 8.5%.

“By the way, when returns are above 8%, the old adage says you should buy that because once returns are low and profit margins shrink, good returns end up for high-return investors,” Amoroso said.

Amoroso said that when it comes to stocks, those who have been investing since 2009 are accustomed to the zero interest rate policy. With this in mind, the term “buy on the dip” in developing stocks has become a popular book. She added that investors are now having a hard time rethinking this approach. She added that what worked in a zero rate policy environment likely won’t work moving forward.

As prices continue to rise, investors need to become more discerning as to what they are buying on a dip. Amoroso added that from now on, not every stock that is growing is worth buying.

“The environment we live in is not one in which non-yielding stocks can perform well, but stocks have a strong cash flow return or a strong business model and are priced accordingly,” Amoroso said.

The only thing that surprised her was that the ETF flows were positive. She specifically referred to those associated with dividend-paying stocks, such as the iShares Select Dividend ETF, which gives exposure to large-cap US companies with an established dividend history. Morningstar rating for ETF four stars. It has a 12-month delayed return of 3.02%.

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