Unlike more conservative long-term investment classes, which have a “set it and forget it’’ comfort to them, high yield and emerging market debt are so volatile they bear close watching, as they’re susceptible to economic cycles and events such as mini-financial crises.
By comparison, some stock classes look tame next to high yield and emerging market. And while overall, stocks have been trending steadily upward, shares of big companies have far outperformed those of small and midsize businesses in the last year.
Some pros argue the pendulum will swing again, as it has many times before, and small cap stocks will stage a prodigious rally.
One reason is that as the economy settles into a solid growth path, smaller companies will see business take off and that earnings power will push up share prices. Another reason is the peculiar psychology of Wall Street: As bond returns come back to earth, investors will come pouring out of them looking for new places to put their money and will fuel a buying spree that will send stock prices higher.
McPherson, the Falmouth financial planner, likes small cap value stocks for their potential. He also suggested considering stocks from emerging market countries, “which go through periods of terrific performance, but when things go south, you have to be prepared to live with it.’’
Meanwhile, Ray Jacques, founder of New England Schooner, an investment adviser in Peabody, suggested that investors try to match their riskier investments with defensive moves that will act as a cushion during bad times. He suggested so-called absolute return funds, which are growing in popularity because they strive not to lose money during market downturns.
Others to consider are funds that invest in conservative blue-chip companies that pay above average dividends, or extremely conservative bond funds paired against a more aggressive stock allocation.
Andrew Caffrey can be reached at email@example.com.