Much has been in the press lately, especially last weekend, about the “Great Rotation” on Wall Street. The story line is that small investors are creating a “great rotation” out of bonds (safety) and toward equities (risk). They tell us that this shift will add momentum to the current bull market and take the indices to new highs.
OH BOY! This sounds good, doesn’t it? Yet, an increasing inflow of capital to the stock market in January is not a new phenomenon, albeit true that the Standard and Poor’s 500 did increase by 5% last month. Investors put $20.7 billion in new money into stocks during the first four weeks of 2013. While this is great news, it is a very small number when we compare it to $410 billion that has been taken from the market since the start of 2008. Nor is this number that unique. In 2011, investors moved $23.9 billion into stock funds and another $28.6 billion in 2006. The year 2011, ended the year relatively flat (-.05%). In 2006, the market did gain 13.62% for the year. To add to our confusion, in January, the market issued $111.725 billion of US high-quality debt and MIZZOU alumnus, Bill Gross, who runs the Pimco Total Return Fund ($285 billion), commented that, “January inflows at Pimco show few signs of bond/stock rotation.”
I don’t want to be Debbie-downer and I am not saying that stocks are not a good place to invest in 2013. There are many reasons for investors to be optimistic. We avoided going over the “fiscal cliff” at the end of 2012, Europe’s problems seem to be more manageable than they were perceived two years ago, and China seems to be stabilizing. (We even avoided the Mayan End of the World on 21 December 2012!) The World Bank, however, comments that developing countries will continue to have growth 1-2 percentage points below what it was before the Great Recession. They also caution those countries to focus their efforts on productivity enhancements, rather than demand stimuli. (Hmm, this sounds familiar.) While the World Bank is cautious, they see that the risks to the world’s economies have diminished compared to last year and that any foreseen impacts from those risks will be less than a year ago. They agree that surprises still await us, behind the doors of Europe, the Middle-East, US fiscal policy[i], and, as always, a black-swan could be lurking overhead.
So, are you ready to rotate? My “tip” for financial success is simple and it is the same as I’ve advocated for years to my friends, clients, students, and readers. Stick to your plan, if you have one. If you don’t have a plan, get one. Then, stick to your plan. Always maintain a well diversified portfolio of investments, employing mutual funds, ETFs, and index funds with exposure to small-, mid-, and large capitalized corporations. Make sure that you not only invest in the United States but take advantage of the opportunities to further diversify by investing overseas in other regions of the world. Don’t shy away from bonds because they are too boring, as they will greatly reduce the volatility of your portfolio. At the same time, don’t be afraid of stocks, because they are too risky. Learn to manage the risks of investing that you cannot control: market risk, inflation, interest rates, and exchange rate risk by investing in each of them. Sure, one will outperform the others and one will be the dog, but you don’t know which one will “win” and which will “bark”, until after it no longer really matters. What does matter is whether you can take care of yourself and your financial goals. If you have a plan, the only rotating you need to do is while you sleep and you will sleep well, knowing you are on course to reach your goals.
For more reading, check out our webpage, where we have assembled a variety of links to investment education materials that we believe to be useful.
 March 1, 2013 is the date that the “meat cleaver” approach to reducing expenditures, known as sequestering, occurs. This is when all federal expenditures are cut, regardless of outcome. I’m sure there are scalpels in Washington, DC, if our elected officials would start looking and work together toward a compromise.
Robert O. Weagley, Ph.D., CFP