Although Stattman's is just one analyst's opinion, his exposure to fixed income is less than half of that of other asset allocation funds. With yields so low, it wouldn’t take much to wipe out a whole year’s worth of yield in a single downturn in the fixed income market. So the alternative thought would be to by TIPS. With inflation at less than 2%, it would take investing in 16 or 17 year maturities just to break even.

 

What about high yield? Surely there’s some comfort there. Stattman says that although the default rate is low, the economy is also slow. High yield, high risk instruments need a growing economy to build confidence and to maintain that low rate of default. As the last few months of economic reports attest, that’s clearly not happening now.

 

And as ugly as the stock markets may have looked lately, they may hold the potential for greater value. It’s counterintuitive for retail investors to buy equities soon after they’ve been beaten up. But we all know that owning equities as they come up off a market bottom holds the potential for some pretty nice returns. How do we know it’s the bottom? We never can tell for sure. Having liquidity on hand to ease back into equities little by little can help retail investors have a presence in the markets as they rebound from a downturn without keeping them up at night worrying about risk.

 

And just because fixed income investments may not hold as much value doesn’t mean investors should abandon them altogether. As at any other time, allocation should be guided by the goal of meeting your client’s objectives, not by what the markets may be forecast to do. Within that, using common sense and stepping back from the crowd can offer an advantage that others may not be willing to see. It’s your call. But it may be a really good time to review your clients' allocation relative to the goals they are trying to achieve.