Fail to Plan and You Plan to Fail

06/18/2013 9:00 am EST

Focus: FUNDS

Janet Brown

President, FundX Investment Group

Investors who have a long-term strategy don't get blindsided by normal market gyrations, says Janet Brown of NoLoad FundX.

As markets consolidate near all-time highs, it's helpful to remember that market pullbacks are normal.

Preparing for pullbacks is very different from attempting to predict them. We prepare for pullbacks by owning balanced portfolios, diversifying our holdings, and reminding ourselves that pullbacks are normal, so that we don't lose sight of our long-term goals when the market moves against us.

After the remarkable run stocks have had this year to date, it is fair to expect some volatility. But that doesn't mean stocks will decline now.

A number of investors have been forecasting a correction for the last few months. Eventually, they will be correct...but when, and from what level? As May's solid gains remind us, the market can keep going up—and we want to participate.

Investors worry that the Fed may soon pull back on its bond-buying efforts, even if it's in response to better economic growth. Although interest rates rose sharply last month, no one knows if they are near the top of a trading range or starting an upward climb.

Having a plan greatly improves your chances of long-term investment success. We believe most investors are better off with a balanced allocation as long as fixed income is actively managed. Investors who hold balanced accounts may be more likely to succeed over the long term simply because they don't feel compelled to run from stock-market declines.

By following an active strategy that aligns with current leadership, we alleviate the need to have predetermined allocations to areas where market leadership changes, like foreign or domestic stock funds and ETFs or high-yield bond funds versus investment-grade bond funds.

We've been in a bull market for bonds, and this has made it pretty easy for investors to pick bonds that turned out to be good investments. But finding good bond investments may be more challenging as bond-market conditions change.

No one knows what the future holds for the bond market, but we do know yields are near all-time lows, and that there is a limit to how much lower yields can go from here. We expect bond returns over the next decade will probably be based on their current yield, at best, and most likely somewhat lower.

Fears about rising interest rates and potentially lower returns for bonds in the coming years have prompted some investors to reconsider their allocation to bonds. But bonds do still play an important role in most of our portfolios: they provide a buffer against the volatility of stocks, and this can help us stay invested through up and down markets.

Instead of reconsidering their allocation to bonds, fixed-income investors may need to reconsider their strategy to ensure that they can adapt to changing bond markets. Our Flexible Income strategy is one of these approaches: it leads us to change our portfolios as bond markets change, and it takes advantage of different areas of the bond market.

There are many types of bonds, and different types tend to do well at different times. High-yield bonds, for example, did very well in 2012 with a gain of more than 15%, while Treasuries gained only 2%. In 2008, high-yields lost 26% while Treasuries gained nearly 14%.

Our adaptable strategy has the ability to capitalize on a rising rate trend (as it did when rates rose in 2006).

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