BOSTON (TheStreet) -- The U.S. economy is recovering -- slowly. Equity markets have rallied nearly 100% off the lows registered in the first quarter of 2009. The S&P 500 index is hovering near its all-time high reached in 2007.
There may still be a ways to go before one can declare a full economic rebound. But as the nation creeps toward that goal, investors have the opportunity to adjust their retirement plans and portfolio strategy accordingly.
Review asset allocations
Taking on a complete asset allocation review is a crucial starting point in the still new year as well as looking ahead to the future, says Dean Junkans, chief investment officer of
Wells Fargo Private Bank
How diversified are you across asset classes -- stocks, bonds, real estate, commodities and complementary strategies? Are you diversified within each asset class and relative to economic sectors? How is your portfolio diversified by sources of income (bond income vs. dividends, for example)? Is it exposed to, and diversified by, different economic factors, such as inflation or government policies?
"A lot of investors need to step back and look at their total portfolio, because it is possible they made some emotional decisions during the market meltdown that they need to rethink and get their portfolio recalibrated back to medium- and long-term goals," Junkans says.
Assess your risk
"I think a lot of people have gotten tired of earning no money in cash, and with the market up roughly 100% since the March 2009 bottom, they are getting some animal spirits back and interested in getting a little bit more aggressive again," Junkans says. "From a lot of perspectives it is good, but there are still risks out there."
There may be a temptation to ramp up your stock exposure, but Junkans suggests a measured, gradual approach -- adding exposure over three to six months depending on how people think about risk versus opportunity.
"If you had a lot of cash on the sideline, I wouldn't jump all in all at once," he says. "I would average back in. because we are overdue for a correction here."
Those who fret about the lost opportunity of a 15% to 20% run over the next six months need to consider also how they will react and cope if they lose money they just put in due to a market correction. "A scenario analysis of how would you feel if this vs. that happens can help you decide how to step back into the market," he says.
For the time being, the Federal Reserve has shown no indication it will tighten monetary policy. Instead, its moves have all but ensured a low-inflation environment for at least the near future. But as the economy improves, these efforts to keep inflation at bay will give way.
An uptick in interest rates will mean higher costs for consumer credit, particularly in mortgages. Those still holding on to adjustable-rate financing may soon see opportunity stop knocking on the chance to lock in low rates with a 15- to 30-year fixed mortgage.
In portfolios, inflationary creep will drive many to invest more heavily in
, "the quintessential inflationary tool" says Peter Maris, founder and principal at
in Wilmette, Ill.
Maris fully expects to see low inflation for the next 12 to 18 months and as such advises clients to seek out strategies that do well during moderate inflationary times.
"If you are getting in on the ground floor, you should start looking at commodities," he says. "If you are getting in at reasonable prices right now as inflation starts to heat up, then you will be in a good position. Some commodities have stayed low, like gas and heating fuel. But others, agricultural commodities like cotton, have already started to pick up."
Many perceive commodity plays as a bit high-risk for a retirement portfolio, but Maris holds that a well-managed mutual fund can offer exposures that improve diversification. "By adding commodities to a portfolio, you lower the volatility of it," he says. "People think it is an aggressive play and, by itself, it sure is. But if you add it to a
well balanced portfolio it looks very good."
Looking forward to an economic rebound means not getting locked in to long-term, low-yielding instruments such as CDs and many bond issues, Maris says.
"Something that is very appropriate now are short-term, floating-rate bond funds," he says, "because companies are getting a little stronger and we are seeing corporations with increased profits, a lot of cash on the books. So as this phenomenon takes hold, it makes a lot of sense."
Dividends are fiends
In diversifying your income stream, dividend-paying and dividend-growing stocks should be considered, Junkans says. Nearly 50% of stocks in the S&P 500 raised their dividend last year, with a median increase of about 10%.
"It is a good reminder for people who are counting on their portfolio for a stream of income that there are places other than bonds to get income," Junkans says. "There are a lot of dividend-paying stocks that pay more than the equivalent intermediate maturity treasury. We are bout 3.4% on the 10-year Treasury now, which has moved up some, but there are a lot of dividend-paying stocks in the 3% to 4% range that are good-quality companies.
"If a bond issuer is doing well, unless it is a floating-rate bond of some type, they don't say, 'I think I'm going to increase your coupon from 3% to 5%.' But it can happen with stocks, and we saw that in a very material way last year with almost half of the stocks in the S&P 500 raising their dividend. I think 2011 will be another pretty good year of dividend increases as well."
Avoid the 'triple whammy'
An improving economy means that the frequently feared municipal bond market can offer "a lot of real attractive opportunities," Junkans says.
"Like a lot of things that come under assault with worries, investments can get shot down indiscriminately, even the good, solid, quality ideas," he says. "Certainly the trading in municipal securities has been real sloppy, but whenever you have fears there are some opportunities as well."
Investors need to avoid what he describes as a "triple whammy" of risk factors, though. He warns there is duration risk, the risk to longer maturities in the face of potentially rising interest rates; credit quality, the risk of defaults in municipalities facing extreme financial difficulties; and diversification risk, as municipal buyers buy one bond at a time.
His advice: Reduce exposure to longer-duration municipal products, leveraged products or certain single-purpose bond issues; own high-quality securities; be diversified across issuers (consider international developed and emerging market, real estate and limited partnerships); if you are buying individual bonds, have at least 15 to 20 minimum; and seek professional advice if you have been investing alone.
-- Written by Joe Mont in Boston.
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