If you plan now, investors can maximize income yet minimize risk as the Federal Reserve finally begins to hike interest rates.
"For dividend-oriented and bond investors, the first Fed rate hike in almost 10 years promises to be painful. Given that prices fall when yields rise, a rate increase wipes out most — if not all — of the yield on income assets," Forbes.com
Here are recommendations from five financial advisers, Forbes.com Contributor Ky Trang Ho reported.
'The Bucket Challenge'
Liz Miller, president of Summit Place Financial Advisors in Summit, N.J. with $120 million under management, urges investors split portfolios into three buckets — each carrying different risks and purposes. “There is no such thing as maximum yield at minimum risk. Even the most carefully modeled and structured absolute-return product can fail miserably,” says Miller. “In a low rate environment, investors need to consider carefully which investors are necessary to protect their portfolio and which investments are meant to support their lifestyle.”
Her three buckets are:
1. A market bucket: "
Stocks and funds as well as any investment that is easily buffeted by the overall markets movements, including most higher-yielding, fixed-income choices."
2. A protection bucket: "
High-quality, minimal risk fixed income. These are all providing very little in yield income today, but they will properly play the role of protecting a portion of our clients portfolio."
3. An income bucket:
"This is only for clients that truly need income generated out of their investments."
Open Up to Closed-End Funds
Keith Lanton, president of Lantern Investments with $1 billion in client assets in Melville, N.Y. recommends closed-end funds — many of which are trading a steep discount to their net asset value. (The NAV is the total assets minus the fund’s liabilities divided by the number of outstanding shares.)
Embrace Long-Term, Investment-Grade Corporate Bonds
Gene Tannuzzo, portfolio manager of the $2.3 billion Columbia Strategic Income Fund (COSIX), recommends buying long-dated, investment-grade corporate bonds.
Opt for Alternative Investments
Sell covered calls on stock or ETF holdings, says Joe Halpern, CEO of Exceed Investments in New York City with $7 million under management. "Covered calls are contracts that give buyers the right — but not the obligation — to buy or “call” away the stock from the seller at a strike price before an expiration date."
Team Up With Master Limited Partnerships
Master limited partnerships are toll-road type businesses that collect fees for transporting, storing and processing oil and gas. Ron Weiner, president and CEO of RDM Financial Group in Westport, Conn., with more than $750 million assets under management recommends MLPs for investors with a three to five-year investment horizon.
Recommendations abound as to how investors can best prepare for higher rates.
"Many money managers aren't waiting to see how the rate-hike soap opera turns out," Investors.com reported.
"They're already buying mutual funds, ETFs and individual securities they like, regardless of when — or even whether — the Fed raises rates."
Ken Graves, managing partner and chief investment officer of Capital Research Advisors, said high-yield municipal bonds are among his favorites. He boosted his stake in April, when many sold off.
Jason O'Donnell has Bluestone Financial Institutions Fund, a financial services hedge fund of which he is CIO, 100 percent invested in community banks. Those banks would benefit from a rate hike.
To buffer clients' portfolios ahead of a rising-rate environment, financial advisers should consider allocating to liquid alternative strategies, InvestmentNews.com reported.
“A return to normal is going to seem pretty nasty,” according to Richard Brink, managing director of alternatives and multi-assets at AllianceBernstein. "Alts" are meant to decrease volatility, so an allocation to alts in a client portfolio help smooth returns, he added.
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