in vogue, and average investors might do well with a growth-oriented portfolio that capitalizes on the money glut. “The market was buying growth in 2006, and I don’t see anything taking away from that,” says Harris. “In a good macroeconomic environment, growth areas like technology and healthcare tend to do very well.”
Bonds: Always a bridesmaid?
With the S&P 500 cranking out more than 13% gains in 2006, and plain old money market funds offering around 5% in interest, bonds didn’t hold a whole lot of sex appeal as an asset class.
In addition there’s the odd situation of the so-called inverted yield curve, which occurs when the interest rate on short-term U.S. government bonds is higher than the rate for long-term bonds. Typically investors would be paid a higher rate for long-term bonds because they are tying up their money for a longer time period. The inverted yield curve has historically indicated that a recession is coming. That certainly makes it challenging now for average investors to know where to place their bets.
That’s why Bruce Goode, president of Goode Investment Management Inc. (No. 12 on the BE ASSET MANAGERS list with $428 million in assets under management), says investors should stick with intermediate bonds, which have a maturity of three to seven years, for the moment. “The curve is flat, but it’s not going to stay flat forever,” says Goode. “By the time it moves and gets back to normal, you don’t want to be too long or too short.” Goode also manages a stable value fund with $247 million in assets, which is regularly ranked as a top performing fund according to Hueler Analytics. Stable value funds are often part of employer 401(k) plans; they offer investors a conservative investment choice that aims to deliver consistent, predictable growth without exposure to market volatility.
Other tips: Don’t bet the farm on a coming interest rate cut, since the next few Federal Reserve calls are going to be very data-driven, and nobody yet knows how that’s going to play out. And don’t count bonds out quite yet, because after a chilly period, they could see a surprising renaissance. “I don’t see a lot of growth in domestic equity markets this year,” says Beal. “There might be a slowdown, and so there could be a flight to quality [a move to more stable, high-quality investments] during this time. So that’s why I’m bullish on bonds.”
Beal likes what he sees on the domestic front, rather than international and emerging market debt. Like Goode, he advises individual investors to stay on the short to intermediate side of the bond market, as curves start getting back to normal.
As for the economy in general, Beal says that you can relax a little about a big bust, because presidential ambitions could have a very real effect on your portfolio–in a good way. “If I was really a cynic, I’d say that in the run-up to the 2008 elections, [the Bush administration] will want to keep the economy very strong.”