Money Talks: Covering all the bases

William F. Hague

With the advent of Major League Baseball Spring Training here in paradise, certainly the excitement level has begun to ramp up with so many options just a short drive away. As we ease into what is becoming an anxious 2017 investing year, clearly the baseball teams will not be the only ones covering all the bases.

In fact, with both the excitement and uncertainty that goes with a new presidential administration combined with the euphoria of the “Trump Effect,” certainly now is a good time to cover all of our bases as it pertains to allocating our portfolio for 2017. With each passing decade, it seem as if we enter into yet another new era of investing as to how we perceive proper and suitable diversification. In other words, what we own and how much of it seems to be more important than ever.

President Donald Trump sits at his desk after a meeting with Intel CEO Brian Krzanich, left, and members of his staff in the Oval Office of the White House in Washington, Wednesday, Feb. 8, 2017. (AP Photo/Pablo Martinez Monsivais)

As we sit and await the fate of this “Trump Effect,” many on Wall Street are still on the fence as to the longevity of this now nine year rally and the potential impact down the road. For investors, and particularly retired investors, it is critical to maintain proper perspective and yet even more important, maintain and control our expectations as to where we go from here. Let’s cover a few bases as it pertains to portfolio allocation and the potential impacts, both good and bad. As we continue into truly uncharted waters with the length and level of this bull market, many are now considering what we may see next.

It is important for investors of all demographics to step back and understand the potential for their portfolios in the event that the markets finally succumb to the forces that can bring a market correction. For stock investors, many enjoy ownership of dividend paying and preferred stocks as a source of annual income. It is critical that investors embrace the facts. The reality is that even with a significant market correction, anything shy of a major global economic meltdown should be manageable as far as the income stream is concerned. Investors can be confident that in most cases, these preferred and dividend paying stocks can in fact lose value during a market correction. However, again in most cases, the actual dividend payout remains fairly stable. In other words, we can certainly expect portfolio values to go down with any market correction, yet at the same time we can also expect the income stream to stay relatively stable.

The same is true for bond investors, which by the way includes mutual funds. Many investors are not aware of this particular bond exposure. At some point as rates begin to increase, we can certainly expect that bond prices will go down as they always have historically. Yet at the same time, much as the dividend paying stocks, the income stream generally stays level. For retired investors, now is the time to ask how comfortable we may be with portfolio losses. In both cases, we see portfolios values down yet income streams level. This allows retired investors to cover all of their “expectation: bases.

In keeping with the theme of covering all of our bases, certainly the importance of proper and true diversification cannot be overstated. Every passing day takes us deeper into the abyss of this uncharted territory as it pertains to the length and level of the markets bull run.

Perhaps now more than ever it is critical for investors to embrace the power that comes with the addition of managed futures to the portfolio. The Nobel Prize winning research known as “Modern Portfolio Theory” illustrates the value and stability that manage futures can bring to the portfolio in any and all market conditions. Although suitability remains different for each investor, it is important to understand managed futures ability to enjoy little correlation with stocks as evidenced by meaningful market gains during serious market corrections.

Certainly in an effort to cover all the bases, investors can realize the power of true diversification en route to the life of a SWAN, Sleep Well At Night.

William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or WFHague@earthlink.net. The opinions and observations stated above are those of the columnist.