Traditionally, a buy-and-hold portfolio of equities and fixed income provided investors a reasonable shot at diversification and increased wealth over time. But post-recession strategies may require some shorter-term thinking, flexibility on the part of the investor and a willingness to include alternative strategies for diversification in order to protect your wealth.
Economic conditions in Europe and China, the looming fiscal cliff, peaking profit margins and low interest rates are all creating a rugged investment landscape. "There are a lot of flying bullets now," says Andrew Mehalko, president of AM Global Wealth Management, which caters to high-net-worth individuals.
Low interest means high risk
As the Federal Reserve commences its third round of quantitative easing, or QE3, hundreds of billions of dollars will be flooding the financial markets in an effort to reduce interest rates, thereby boosting stock prices and encouraging people to spend on homes and equities. "By easing monetary conditions even in the face of inflation, they want investors to take some risk," Mehalko says.
That means fixed income, in particular, is a concern for investors who are taking risk without realizing it because the low rates aren't keeping up with inflation.
According to Mehalko, investors who stick to their buy-and-hold fixed-income strategy are afraid of engaging in what they believe is market-timing or of losing out on long-term returns. The key is to focus on risk first, he notes. By doing that, they'll see the need to be more active in reducing exposure to risk when conditions change. "We're in the stay-wealthy business," he says, adding that it's better to have consistent, lower returns than volatile returns.
Be ready to make changes
Mehalko says investors with bond portfolios who enjoyed decent rates of return will have the most difficult time switching gears in response to the inevitable low rates we'll see going forward. "When the time comes to make a change, they won't want to do it, but you have to think of it as more of a short-term issue and be ready to make changes when the Fed changes."
While Mehalko's clients will still be invested in fixed income -- high-yield bonds, for example -- he advises looking beyond traditional diversification strategies of stocks and bonds. Alternative investments do not necessarily need a declining interest rate environment to perform well, Mehalko notes, so they are a good addition to stabilize and diversify a portfolio.
Paying attention to fast-moving economic changes and a willingness to look at your portfolio from the standpoint of risk first and growth second will help you keep more of your hard-earned wealth.
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