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2 Sure-Fire Ways to Capture Dividends
03/27/2012 6:30 am EST
It’s crucial for individual investors to stay in the market these days, and don’t get flustered by day-to-day volatility, says Harbor Financial Group founder Elyse Foster. She shares ideas for a couple of dividend investments she likes.
Kate Stalter: Today I am on the phone with Elyse Foster of Harbor Financial Group.
Elyse, we have spoken before. I know that you are an advisor who will make adjustments in your clients’ portfolios in response to market conditions. We’ve got low interest rates these days, but the stock market has been in rally mode. How are you advising individual investors in this environment?
Elyse Foster: Well, that’s a very good place to start, and in my thought process I find myself repeating to clients, “First things first: You need to be in the market.”
And you would not think that would necessarily be a critical element in the discussion, but I think it is, because so many people are out of the market currently. A lot of very good minds, a lot of learned people, are saying they don’t want to be part of either the domestic or the foreign stock, or even in some cases the bond market, so I think the first bit of advice is to be in the market.
And the main reason for that is that I don’t believe that most of us mere mortals can afford to miss any upside potential in our market cycles at this point. I think most of us would agree that, the economic—domestic as well as abroad—the geopolitical problems that we have in the world are still there. It’s not that one looks beyond them or ignores them.
The fact of the matter is if you have a run-up in the Wilshire—for example, it’s just under 10% for the last year through today—if you have a run-up of that nature, I think you need to be in the market and take advantage of it.
Another aspect, of course, is how you do it. And there are some good questions that I think can be directed towards how one is in the market and contains their risk. But that’s my first and foremost bit of advice to them.
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Kate Stalter: To follow up on the idea of containing risk, even though the equities markets have been in rally mode: There have been a lot of steep downside days, so what is your advice on managing risk and handling these sudden downturns?
Elyse Foster: I think again such a critical, critical point. I think first of all for the individual, especially, is to acknowledge the risk. Think about it.
Realize that if you’re going to be in the market—or indeed, if you’re going to be out of the market—you’re going to be accepting a certain amount of risk. So I think acknowledging it is important. More specifically through our advice, what we’re saying is try to ignore the short-term volatility in this particular market cycle.
We believe that you can’t trade into it. We don’t think that you can call the market cycles or the ups and downs, and so the best thing to do is to try to ignore most of it, and focus on your return and have a reasonable return expectation.
And then, we think, diversification. It’s an old, old saw, but we think it’s very important in this particular market. Mostly because we don’t think it’s very clear as to which kinds of asset classes will be performing at any one given time. The market’s moving so quickly and with such volatility that we think it’s better to remain diversified.
Kate Stalter: Let’s get a little bit specific about that, Elyse. What are some of the instruments you’re putting clients into these days?
Elyse Foster: Our portfolios are well-iversified amongst a percentage of domestic and foreign equities, both large-cap as well as smaller-cap.
In addition, we do have emerging markets, and more recently, emerging local bond market exposure. For example, with this portfolio that I just sketched out, that’s fairly well diversified, we took advantage of the Eurozone crisis several months ago when prices were quite low for emerging market equities, as well as emerging market debt, and took a position in emerging local bonds.
In addition, we filled out our position to emerging local equity positions. So there is an example of diversification that we think works quite well in this particular market.
Kate Stalter: There has been just a lot of talk overall in the media with regard to asset allocation—precious metals, large-caps, the asset class known as Apple (AAPL). How do you look at all these different choices, and how should individuals determine what is best for them at this point? Because it can be confusing.
Elyse Foster: I think it’s incredibly confusing. We were talking a few minutes ago about how difficult this particular market is to manage money and to understand where you should be putting your money.
We believe to answer the first part of your question that a good percentage of commodities, hard assets, assets in the energy areas, is a very important component of portfolios these days. We have kept our allocation to this category consistent for many years.
Now, I think it was last summer—so that would be the summer of 2011—we did lighten, and we trimmed back on and took profits on our commodities positions. But we think it’s important to be diversified into that area. It helps not only from a return point of view over time, but it also, we believe, will position portfolios to weather an inflationary period well.
You laugh about the asset class known as Apple. It’s a favorite of ours. We think it’s a great stock. We think it’s a great company, and we own Apple through one of our mutual funds. We think it’s important to take advantage of a stock like Apple.
Kate Stalter: Elyse, one other thing I wanted to ask you about today is the dividend trade. That’s obviously something else that’s come under quite a lot of attention lately. What thoughts do you have on that topic?
Elyse Foster: We’re very favorably inclined towards building dividends into portfolios. We think that it’s a good conservative component towards portfolios, which is a really good place to position oneself right now.
It also can comprise a pretty good chunk of your overall return in this kind of low return environment. So, we build those into our portfolios regularly.
Kate Stalter: Any specific ideas that you might want to share with our listeners today?
Elyse Foster: Absolutely. We have a couple of funds that we think work very well for incorporating dividends in. One is Yacktman (YACKX) and the other is Wisdom Tree Dividend Ex-Financials (DTN). That particular group has created a modified index fund that excludes financial stocks which we think makes it a little more conservative.
Kate Stalter: And do you use both mutual funds as well as ETFs in these areas?
Elyse Foster: Yes, we do. We generally follow what I call a barbell approach, where we have half the allocation for a particular category. For example, the large-cap value space. Then we have half for an active managed fund and half for an index choice.
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