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We continue to maintain a diversified investment strategy that attempts to protect portfolios against the known and unknown risks facing investors. Below are a few thoughts on different asset classes based on the current environment.
Bonds - Although interest rates are expected to go up, we expect the increase to be gradual over the next one to three years. As such, we continue to maintain exposure to bonds, but have moved into unrestrained and multi-sector strategies to grant the managers any needed flexibility to shorten their maturity and even short bonds if they feel strongly compelled. These funds will also increase their credit risk where they feel the reward is warranted.
Enhanced-Yield Strategies - Our strategy for this asset class has not changed. We continue to maintain exposure to higher yielding bonds that are driven by the economy and not as much by fluctuations in interested rates. We also continue to invest in private debt transactions as small companies struggle to find banks willing to lend. In the private debt area, we continue to seek deals with strong collateral and expect low to mid-teen returns.
Stocks - It appears the Federal Reserve continues to be motivated to support the economy and thereby the stock market. A study by J.P. Morgan showed that historically, when 10-year Treasury yields are below 5% and rising, stock prices tend to rise as well. For 2014, we don’t expect nearly the same returns experienced in 2013, but believe the stock market will end the year positive. We’ve carved off some of the profits and reallocated the cash to other asset classes.
Real Estate - We continue to maintain our real estate targets with a focus on income producing properties, particularly in the multi-family and commercial sectors. We are certainly not finding the same opportunities that were available from 2008 through 2010, but we are still finding attractive deals with strong fundamentals and strong cash flows. In fact, in 2014, we expect to sell much of the real estate that was acquired after the Sub-Prime Meltdown in 2008. As assets are selling, we are redeploying the cash into new opportunities. Some of these new deals are equity ownership in new properties whereas some deals are being done with mezzanine debt and preferred equity to improve our security and shorten our investment time horizon in case we do see a spike in interest rates.
Commodities/Managed Futures - Last year, Commodities and Managed Futures presented the biggest drag on clients’ portfolios. We continue to use these asset classes to mitigate the risks of increased inflation expectations and a weakening dollar, as well as provide investments that are uncorrelated to other asset classes.
Disclosures: This commentary is submitted for the general information of Cornerstone Wealth Management, LLC clients and may not be distributed to other individuals. This commentary is not deemed to be investment advice and information contained herein may not be current. An investor should consider the investment objectives, risks, charges, and expenses of each investment carefully before investing. For more complete information, you may contact us at 858-676-1000. Past performance is no guarantee of future results. Individual performance may vary and investment performance numbers may not be audited.