This week global stock markets took a hit, but U.S. bonds rallied in
impressive fashion, serving as a powerful reminder of the crucial role
diversification plays in your investment strategy and the potential benefits it
can bring.
While the Magnificent Seven of Apple, Microsoft, Nvidia, Tesla, Google,
Amazon and Meta have attracted a lot of attention this past year with stellar
rallies, sophisticated investors have been taking profits and building
positions in bonds which took a historic beating as interest rates went from
zero to 5.25%.
Recession fears are growing like an ominous storm on the horizon as the
S&P 500 has dropped over 8%, the NASDAQ has declined over 11%, and
the Japanese stock market dropped over 12% in one day. Meanwhile, bond
prices have rallied more than 2% this past week, as they usually do when
the economy falters, and investors look for safety and solid dividends. Now,
that’s not necessarily a huge move, but it does help cushion a drop in a
stock portfolio if an investor has 20% to 40% of holdings in bonds.
I personally don’t own many bonds because I prefer the long-term gains
that only great American companies can provide. But over the last year, I
did increase my exposure to bonds to take advantage of much higher
dividends and the possibility of price increases if the economy faltered.
Now, I get to look for buying opportunities on great-quality stocks as prices
get more and more attractive.
Ultimately, the terrible run of the Biden/Harris inflation and the many rate
increases by the Federal Reserve to subdue inflation are now taking their
toll on consumers. For example, Disney has just announced reduced
spending on theme parks.
If you haven’t conducted a risk management analysis of your investment
strategy, now is the time to do so. It’s never too late to engage in a
strategic discussion with your financial advisor about your investment policy
guidelines to grow and protect your money.
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