Your Money Matters: Investing in 2014

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Maury Fertig

Relative Value Partners
1033 Skokie Blvd., Suite 470
(847) 513-6300

Maury’s Advice

US Equity market will exhibit more up/down volatility than last year. The US equity market is somewhat fair to fully valued with a current price/earnings ratio of 17+ the market really needs stronger earnings to propel the market higher.  Other measures such as investor sentiment, low cash balances and insider selling point to potential weakness ahead.

The US equity market has experienced one 10% sell-off per year on average since 1926. The last 10%+ correction was October 2011.  On average the market has seen a drawdown of 15% within 6 months of a new fed chairman.

As the market is within 1% of its closing all-time high, if I wanted to invest now, I would take a dollar cost averaging approach, or wait for a pullback. Even the one sparked by emerging market weakness was -7% in early February.

As for sectors, energy and finance have potential to outperform this year, and emerging markets look very cheap and have underperformed the US market by over 40% during the past 16 months. They are not for the faint of heart , but should be added on further weakness or fear regarding Chinese growth, Russian expansion or Turkish currency devaluation.

My favorite pick in equities today is the Blackrock Enhanced Dividend Fund  (BDJ) The largest holdings include Wells Fargo, Chevron and GE. The fund trades at a 13% discount to the value of its underlying stocks and yield 7.2%.  This is a somewhat defensive fund and should hold up better than the market in the event of a sell-off.

And Bonds of course hold the key to everything these days!

We expect rates to be moderately higher by year-end, 3.5% on the 10 year, up from 3% on 12/31/13.  Positive returns should be available in bonds this year. We favor limited duration closed end funds which have solid yields, but will be defensive in a bond sell-off. These funds include:

Eaton Vance limited duration (EVV) Average duration of 3.3 years.  Yield in excess of 7%. Consists of floating rate bonds, mortgages and high yield.

MFS Intermediate Income Fund (MIN) owns investment grade bonds and the underlying yield is around 3.5%.  This fund will hold up well if we are wrong and enter a recessionary environment  . Both of these funds trade at a discount of 7% to their underlying value or net asset value.


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