Penn Wealth Publishing

2017.12.03 Penn Wealth Report Vol 5 Issue 03

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6 Penn Wealth RePoRt volume 5 issue 03 03 Dec 2017 Penn Wealth RePoRt Copyright 2017. All Rights Reserved. investment intelligence Investment Protection Strategies Protecting Your Portfolio When I began researching what we had done—or wish we had done— before and during past market pullbacks we navigated for clients, one certainty came into focus: just because something worked beau- tifully during a past correction doesn't mean it would work at all during the next one. This factor complicates our development of a bear market or correction strategy going forward. Take a look at the Callan chart on the right side of the follow- ing page. The three columns represent three of the worst years for the stock market since the Great Depression—two during the tech bubble burst and one during the Great Recession. If you look at the top three rows, representing the best performing asset classes and styles for those years, you see that the olive green tiles entitled "Bloomberg Barclays Agg," which represent an aggre- gate of US bonds, were the "safest" place to park money during recent tumultuous periods. The index is composed of roughly 40% US gov- ernment bonds, with the remainder divided between corporates, secu- ritized notes (think mortgages), and cash. Now take a look at the "Effective Federal Funds Rate" chart to the right. Notice what is markedly dif- ferent between these past periods and now? You got it—rates back then had plenty of room to fall, at the Fed's behest, pumping up the value of bonds already in circula- tion. Today, interest rates have nowhere to go but up, at which point bonds and bond funds will lose value, to varying degrees. And look at the second-best holding in 2008, the "Barclays High Yield" index, which only lost 26% on the year! Nope, this time around we need a different set of solutions. So cash and bonds won't work this time? Even though US interest rates are ultra-low, there are plenty of higher yielding havens around the world. When you get to the matrix of Penn holdings later in the Report, you'll notice we added an emerging markets bond fund, currently yield- ing 5.02%, and a world bond fund which has grown 9.47% in the past year. Get this: the world bond fund has a negative duration, mean- ing—at least in theory—it should actually go up in value as rates rise. Smart. Again, at least in theory. And it is still fine to own US bonds, both government and cor- porate. Just remember to keep the duration low. For example, we recently stumbled across some 3.5% short-term Ford notes. By the time they mature in a few years, we should have some nice, high- er-yielding alternatives. As for cash, it may not be paying much, but you can bet it won't go down in a cor- rection. We currently hold between 5% and 12% cash, depending on the strategy. And remember, if you don't have any cash during a mar- ket downturn, you won't have any buying power for good deals. All corrections are not alike—the next battle will require a new set of weapons

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