S&P 500 Is On Track To Complete A Pattern That Has Ended In Annual Gains 100% Of The Time

The S&P 500 finished February in the black, and history suggests it should be positive for the year.

The S&P 500 managed to close out February with a fourth straight month of gains.  In a recent research note, Sam Stovall of S&P Capital IQ reports that there have been 26 times since 1945 that the S&P 500 scored gains in both January and February.

In all 26 instances, Stovall says the "500" recorded a positive calendar year total return, averaging an advance—including dividends—of 24 percent and posting full-year results that were in the single digits just twice: 1987 and 2011.

Looking ahead, if the market performs well in January and February, history implies the bulls keep kicking their heels in March. As Stovall notes, following gains in both January and February, the S&P 500 records an average gain of 1.1 percent and had been positive 69 percent of the time.

Then again, before committing capital, Stovall also offers a careful reminder: history might suggest such bullish performance but certainly doesn't guarantee it.

Source:  Patti Domm, CNBC  

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Preferred ETF with 6% Dividend Trying to Break Out

Preferred stock Exchange Traded Funds (ETFs) have delivered nicely for shareholders with steady returns, decent yields and low volatility.

The iShares S&P U.S. Preferred Stock Index Fund (NYSE: PFF) is the largest ETF in the category and pays a 12-month yield of 6%.

Now the fund is trying to break out to its highest level since the financial crisis after posting a total return of about 18% in 2012.

Preferred shares are hybrid securities that combine some features of stocks and bonds.

The $11.6 billion ETF has been remarkably stable while also paying investors a steady stream of dividends. The last quarter it suffered a loss was in Q3 2011.

“With yield so scarce today, investors are branching out into different asset classes in the search for income. Preferred stock can be a high-yielding addition to a diversified income-seeking portfolio,” says Morningstar analyst Abby Woodham.

“Preferred stock is a hybrid security usually issued by highly leveraged companies, such as financial institutions, telecoms, and utilities,” Woodham writes in a profile of PFF.

For example, PFF is heavily concentrated in the financial sector, including European banks.

Preferred shares pay higher dividends but don’t carry voting rights.

“Low correlations to other income assets make preferred stock a surprisingly good portfolio diversifier. The yield of preferred stock ETFs is almost unmatched on a risk-adjusted basis,” the Morningstar analyst notes.

Of course, preferred stock funds are not without risks – large stakes in the financial sector are an obvious one. Other risks include potential regulatory changes, rising interest rates, issuer bankruptcies and limited opportunities for capital appreciation, Woodham points out.

Source:  John Spence, ETF Trends

PFF is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

A Dividend ETF with a Focus on Quality

Dividends provide an additional source of income and returns in an equity portfolio, but investors should still know the type of exposure dividend exchange traded fund investments provide.

While high yield dividend ETFs generate attractive yields, the dividends may not be sustainable or the stocks could be more susceptible to market volatility. On the other hand, investors can take a look at stable “Dividend Achievers” that have a regularly increased dividends over the past.

Vanguard offers a high-yield ETF, the Vanguard High Dividend Yield Index ETF (NYSE: VYM), which recently had its expense ratio lowered to 0.10% from 0.13%. The fund only tracks U.S. dividend payers, excluding real estate investment trusts, excludes companies that did not pay a dividend in the past year and ranks holdings by yield. VYM has a 3.05% 12-month yield.


Source:  Tom Lydon, ETF Trends

VYM is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

The Sequester: What Investors Need to Know

Absent some quick progress in Washington over the next few days, the sequester– $85 billion in across-the-board federal spending cuts – will most likely hit this Friday.

While some of the cuts may be rescinded during March budget negotiations, at least some should stick.

Despite their modest size, the cuts will be, at least temporarily, disruptive to the US economy and markets. Here’s why:

• The Sequester Will Increase Fiscal Drag.  Fiscal drag from the spending cuts alone is likely to be as high as 0.5% of US GDP. But fiscal drag from the cuts and recent tax hikes combined is likely to be around 2% of 2013 GDP, a large hit for an economy that barely grew by that much last year.
• Today’s Low Interest Rate Environment Could Strengthen the Sequester’s Impact. There is also some evidence that the damper on the economy from spending cuts and higher taxes could be even greater when interest rates are close to zero and other countries are going through the same austerity exercise.
• Slow Growth Should Slow Stock Market Gains. The sudden drop in government spending and recent taxes will likely mean modestly slower US growth during the first two quarters of this year.  This, in turn, may slow equity market gains as we move into March.

Given that the overall economic environment is likely to deteriorate a bit in the near term thanks to significant fiscal drag, market gains will get tougher from here and investors should be prepared for a rocky road ahead. In other words, last week’s market selloff and volatility spike could be a sign of things to come over the next couple months.

That said stocks can move higher in 2013. While investors were rightly concerned last week about slow growth, their worries about the end of the Federal Reserve’s quantitative program were premature. In fact, if the Sequester hits , the Fed would be even more likely to keep up its asset purchase program in an effort to offset the drag on economic growth.

The upshot? As at least some of the sequester’s resulting fiscal drag is likely to be temporary, investors may want to view any equity market volatility as a long-term buying opportunity.

Source:  Russ Koesterich, BlackRock Chief Investment Strategist

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

One Quarter of US Has More Card Debt Than Savings

Rumors of the spendthrift American consumer may be slightly exaggerated. Bankrate's 2013 February Financial Security Index found that a majority of consumers — by a narrow margin — say they have more savings than credit card debt.

For more than half the country, 55 percent, an emergency fund outweighs credit card debt. Nearly a quarter, 24 percent, admit to having more debt on plastic than money in the bank, while 16 percent say they have neither credit card debt nor savings. That puts 40 percent of the population close to the edge of ruin while everyone else seems to be sitting pretty.

The answer may be that although credit card balances came down through the financial downturn that began in 2007, consumers' fundamental behavior of not saving enough did not change.


Source: Sheyna Steiner, BankRate

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Investment-Related Taxes: Must-Knows for 2013

As 2012 wound down, fairly decent-sized tax hikes loomed for 2013, and tax-savvy investors and their advisors were scrambling. Dividends were set to once again be taxed at ordinary income tax rates, long-term capital gains were to jump to 20%, and estates of more than $1 million would be taxable at a 55% rate.

In the end, however, the changes that did pass through Congress were much more modest; few individuals will have to completely rework their financial plans to avoid much higher tax bills next year. That said, tax planning is one of the few categories that investors have a fair amount of control over: Maximizing tax-sheltered accounts, putting the right types of assets in tax-sheltered and taxable accounts, and properly sequencing withdrawals in retirement can all help improve your aftertax returns.

Here's an overview of some of the key tax-related changes that are taking effect with the 2013 tax year.

Dividend Tax - Although the impending hike in the dividend tax rate had led to a lot of hand-wringing, the modest increase that passed through Congress won't affect most investors. As in the past, investors in the 10% and 15% tax brackets will pay nothing on qualified dividends, and those in the 25%, 28%, 33%, and 35% tax brackets will pay a 15% rate on their qualified dividend income. The only change is for single filers earning more than $400,000 and married couples filing jointly who earn more than $450,000; for them, a new 20% dividend tax rate will kick in starting this year.

Even if you're not in the highest tax bracket, it still makes sense to consider parking dividend payers in your tax-sheltered accounts and reserving your taxable account for holdings that don't pay dividends. The key reason is loss of control. If a company that you hold in your taxable account pays a dividend, that's a taxable event for you, whether you wanted that dividend or not.  By holding nondividend payers in your taxable accounts, by contrast, you won't be on the hook for taxes unless you take action and sell shares.

Tax on Long-Term Capital Gains - As with dividend taxes, much is staying the same with long-term capital gains rates. Those in the 10% and 15% brackets will not owe capital gains tax on securities held for more than a year, while those in the 25%-35% brackets will see their long-term capital gains taxed at a 15% rate. The 20% capital gains rate will kick in for the same taxpayers who are seeing a dividend tax hike: single filers earning more than $400,000 and married couples filing jointly who earn more than $450,000.

Medicare Surtax - An outgrowth of the new health-care law, this new tax was moving full steam ahead regardless of what happened with the fiscal cliff negotiations. The 3.8% tax will be imposed on the lesser of an individual's net investment income for the year or adjusted gross income in excess of $200,000 for single filers and $250,000 for married taxpayers filing jointly. (Note that investment income is included in adjusted gross income.) What counts as net investment income? Short- and long-term capital gains, the taxable portion of annuity income, royalties, and rents. In addition, net investment income includes trading of financial instruments and commodities and income from passive activities (earnings from a business in which you have limited involvement). Net investment income does not include municipal-bond income, distributions from IRAs or other qualified retirement plans, pension and Social Security income, or capital gains from the sale of a principal residence, assuming the gains don't exceed $250,000 for individuals and $500,000 for couples and meet the other requirements to qualify for the Section 121 exclusion.

IRA Contribution and Income Limits - Contribution limits for IRAs are going up, at least a little. Investors under age 50 will be able to contribute $5,500 to their IRAs--either Roth or traditional--starting with the 2013 tax year, whereas individuals over age 50 can contribute $6,500. However, if you're squeaking in a contribution for the 2012 tax year, earlier limits ($5,000 for those under 50 and $6,000 for those over it) will apply.

Income limits for IRA contributions have also bumped up a bit. Individuals earning less than $69,000 in 2013 who are covered by a company retirement plan can make at least a partially deductible contribution to a traditional IRA. (Contributions phase out, or are reduced, for individuals who make between $59,000 and $69,000.) Married couples filing jointly can make at least a partially deductible IRA contribution if they earn less than $115,000. (Contributions begin to phase out for couples who make between $95,000 and $115,000.)

Roth IRA income limits have also increased. Individuals filing singly and making less than $127,000 will be able to make at least a partial Roth IRA contribution in 2013. (The amount you can contribute is phased out, or reduced, for single filers who make between $112,000 and $127,000 a year.) Married couples filing jointly can make at least a partial contribution if they earn less than $188,000 per year in 2013. (Contributions begin to phase out for joint filers earning between $178,000 and $188,000.) Individuals of any age can make a Roth IRA contribution, as long as they have eligible compensation, such as wages, salaries, tips, and commissions.

401(k) Contribution Limits - The maximum 401(k) contribution has jumped slightly in 2013: It's $17,500 for those under age 50 and $23,000 for savers over 50. (Contribution limits for 403(b) and 457 plan participants are the same.) If you're just turning 50 this year, note that you can start contributing extra catch-up amounts at the beginning of the year; you don't need to wait until your birthday.

Estate Tax - Although the estate tax was poised to affect many more estates starting in 2013, the estate tax exemption will remain over $5 million ($5.25 million, to be exact) per individual, and the top estate tax rate will increase to 40% from 35% last year.

The very high exemption amount, as well as the concept of portability of exclusion amounts between spouses, makes the creation of bypass trusts arguably less essential than it once was. Yet generous estate-tax laws notwithstanding, everyone needs to mind basic estate-planning matters, including properly drafted beneficiary designations, guardianships for minor children, and powers of attorney for financial and health-care matters.

Gift Tax - The annual gift tax exclusion amount jumps to $14,000 for 2013. That means you can gift $14,000 apiece to an unlimited number of people this year without having to worry about a gift tax or even fill out the gift tax paperwork. Savers in 529 college-savings plans can actually gift $70,000 to a single individual in a single year without triggering a gift tax, assuming they make no further contributions to the same individual's college plan in the subsequent four years. In that case, the Internal Revenue Service assumes that your contribution is spread over five years. Married couples can actually contribute $140,000 to one child's college-savings plan in 2013--assuming they make no further gifts from 2014 through 2017--without getting into gift tax terrain.

Also, if you're gifting to pay educational or medical expenses, you can circumvent the gift tax system altogether by making payments directly to the educational or medical institution.

Source:  Christine Benz, Morningstar

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Floating Rate Funds Provide Hedge Against Rising Rates

U.S. Treasury yields are at record lows with no relief in sight, causing financial advisors to search for new sources of yield. One popular alternative strategy has been “floating rate” funds that invest in short-term bank loans made to leveraged companies. These floating rate bank loans are reset frequently––typically every three months or less. Their short duration and variable rates that “float” when market conditions change can help protect against rising interest rates.

And from an income perspective, the collective group of bank loan mutual funds tracked by Morningstar Inc. sports an appealing current SEC yield of 4.5 percent (as of January 31).

That said, there are obvious risks associated with lending to highly leveraged companies.  Bank loans have little interest rate risk, but they do have credit risk.  Most companies seeking bank loans are below investment grade.

These funds are something that would do well in a growing economy with a rising inflation rate.  A  healthy economy helps these companies increase sales and cash flow, while the reset in interest rates helps protect against rising inflation.

But bank loan funds can incur losses during rough patches for the economy and the stock market.

There are an ever-growing number of funds in the bank loan space. Morningstar tracks 41 mutual funds in this sector, and three new funds launched in the fourth quarter alone, including one from DoubleLine. There are also two exchange-traded funds focused on bank loan exposure––the PowerShares Senior Loan Port (BKLN) and the Highland/iBoxx Senior Loan ETF (SNLN).

Two mutual names in the group are Fidelity Floating Rate Hi Income fund (FFRHX) and the Eaton Vance Floating Rate fund (EABLX).  These are more conservatively positioned bank loans funds where you give up some upside potential in order to have superior downside protection.

But be mindful of the credit risk of these products and not view them as a substitute for money market funds.

Source:  Nathan Greenwald, Financial Advisor magazine


BKLN is a component of the D2 Capital Management Multi-Asset Income Portfolio and EABLX is a component of many D2 Capital Management fixed income portfolios.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

52%: Growth of municipal bond supply

Municipal bonds turned in a strong January, despite a pick-up in issuance as the month wore on. According to Thomson Reuters, supply came in at $26.5 billion, which was 52% higher than last January and exceeded market expectations. Demand, in the form of fund flows, was a strong $7.2 billion. This was 24% greater than last year and seemed to confirm the continued investor appetite for income, as well as tax protection.

Generally positive US economic growth over the past several months is leading to growing tax revenue for states and smaller out-year budget gaps. The market now turns its focus to Washington and the pending March 1 sequestration cuts, and then to the April 15 tax payment date where the new, more onerous tax rate regime should remind investors of the importance of sheltering income via municipal bonds.

Source:  BlackRock

The D2 Capital Management Tax Free Bond Portfolio takes advantage of these opportunities.


The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Options abound for income-seekers

With rates at historic lows, investors can't rely only on bonds but also must look at equities.

Retired people and those approaching retirement are particularly challenged in finding investments to help meet their income needs. With interest rates at historic lows, investors can't rely solely on bonds but must seek out opportunities in equity markets to capture attractive yields.

For example, dividend-paying equity investments have become a viable source of income relative to bonds and provide potential for capital appreciation. In fact, the S&P 500's dividend yield (2.2%) is beating the 10-year Treasury yield (1.8%) for the first time since the 1950s.

In addition to dividend-paying common stocks, some areas of the equity market offer investors the chance to capture high yields (4% to 7%) that compare favorably with many parts of the bond market. These areas are supported by healthy fundamentals and strong balance sheets.

In fact, unlike fixed-income coupons, their dividends may have growth potential, providing a built-in inflation hedge. In this environment, investors may want to consider securities from these areas.

These tax-advantaged entities are a key component of the United States' energy infrastructure.

Typically, master limited partnerships own and operate assets such as oil and gas pipelines, storage facilities and terminals, and equipment.

Most larger-cap MLPs operate “midstream” — meaning that they provide oil and gas transportation and storage for other energy companies. MLPs operate more than 400,000 miles of pipeline in the United States, a number that is expected to grow dramatically as more deposits are discovered and tapped.

Because of their unique position within the energy value chain, MLPs effectively are “toll collectors,” charging a fee for use of their assets, usually on a longer-term fixed contract. This makes MLP cash flows stable and predictable, and allows them to return large amounts of their operating cash flow to investors, with distributions in the 4% to 8% range.

A real estate investment trust owns and operates income-producing residential or commercial properties. To qualify as a REIT, a company must have at least 75% of its income and asset base tied to real estate investments and must distribute at least 90% of its net taxable income to shareholders annually.

Profitable REITs are a good source of stable dividends for investors.

Available in many categories, REITs have varying sensitivities to economic variables. For example, a shopping-center REIT may be sensitive to consumer spending, while an office building REIT may be more sensitive to white-collar-job growth.

With the 65-and-over category the fastest-growing age group, the outlook for health care REITs is fairly optimistic. We also expect stable profit and dividend growth in the senior-housing and assisted-living industries.

The long-term (five-plus years) nature of health care facility leases lends stability to dividends, which are as high as almost 5%.

Preferred stock is a hybrid of common stock and corporate bonds. Dividends are similar to bond coupons, in that they tend to be fixed.

Price appreciation also tends to be capped, but because these securities are junior to bonds in the capital structure, yields are higher (currently 5% to 7%). Nearly 85% of preferred stocks are financials, but with banks returning to profitability, this may be a positive.

A portfolio comprising companies from those areas and high-dividend common stocks can help investors achieve their income needs. Those who feel comfortable with more volatility can garner higher yields, with growth potential and a capital gains upside.

Source:  James Wong, Principal at Payden & Rygel and co-portfolio manager of their domestic large-cap and global equity portfolio strategies.

MLPs, REITs, and Preferred Stock are all components of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Bond Yields Are Up; Should We Worry?

It seems that every day there is a news article about why bond investors should be worried. Whether it's the threat of higher inflation or stronger growth or hints that the Fed may be thinking of reducing its bond buying programs, expectations are for interest rates to move higher. Ten-year Treasury yields are up by about half a percentage  point from early December, which is a significant move given the low starting point for yields. Since most investors buy bonds for the more stable part of their portfolios, rising interest rates can be unsettling. Should we worry?

The factors supporting our "lower for longer" viewpoint are still in place. The economy is still growing at a sluggish pace, inflation is still low and the Fed is still maintaining its accommodative policy. For all of 2012, the GDP growth rate was about 2% and the early estimate for Q4 2012 was a slight contraction in growth. With fiscal policy likely to tighten in 2013, it may be hard for the economy to generate stronger momentum. Based on the current Consumer Price Index, inflation is running at a 1.7% year-over-year pace, below the Fed's long-term target of 2%. Unemployment remains high at 7.9%, even though the pace of job growth last year was somewhat stronger than previously reported. Even with stronger job growth of about 180,000 per month, it would take until late 2014 to reach the Fed's target of 6.5%, according to the Federal Reserve Bank of Atlanta's model.

Higher interest rates are likely to be met with stronger demand. Investors searching for higher yielding investments have had few good choices for the past three or four years. They've had to reach for yield by moving out in maturity or down in credit quality. With the demographic shift of the baby boom generation moving into retirement, we believe there will be demand for bonds as interest rates move up, tempering the magnitude of increase, all else being equal. The number of people in the age group where income is an important investment goal is rising relative to those who usually favor growth from their investments.

Bottom line: Our outlook is for interest rates to remain in a low range this year, but with the potential to edge higher. Bond and bond fund holders should be aware of the risks of rising rates and make careful decisions about how to be positioned in fixed income when rates rise.

Source:  Charles Schwab

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Bond Funds If Rates Rise

It's a well-told story by now—investors have been adding money at record rates into bond mutual funds over the past several years. One side of this story is that risk-aversion has driven investors into bond mutual funds. However, it's also possible—we think likely—that some investors are motivated by a desire to generate income, especially as they age. No matter what the motivation behind the fund flows, is it possible to estimate the possible impact to different types of bond funds if and when rates rise?

There is no single bond market, or a single interest rate. The global bond markets are larger and more diverse than global public equity markets, and each market has different motivations from different types of investors. If rates rise, the impact on different types of bonds and types of bond funds will vary in magnitude, we believe—though it is important to note, as most investors know, that rising rates will likely have some negative impact on the price of most bond funds.

One useful feature of bonds is that they have a fixed time horizon. Equities, for all their value and worth as long-term investments with potential to grow, do not have fixed maturities or time horizon for investments. This is why an appropriate balance of stocks and bonds in a portfolio still makes sense to us, based on your time horizon and risk tolerance. Bond funds do not have a fixed maturity date. But investors can choose funds that target certain maturities. The bond fund doesn't mature, but the bonds held within the fund have greater or lesser interest rate risk depending on their average maturity.

Invest in bond funds based on your time horizon. When might you need to spend your principal? That's a good rule of thumb when thinking about an investment in bond funds. For money that's needed very soon, we suggest sticking with cash investments or checking or savings accounts where the risk from interest rates is lowest. For money needed within the next 1-3 years, focus on short-term bond funds. These funds hold shorter-maturity bonds and are generally less volatile in a rising rate environment. The fund mangers can also take advantage of higher rates more quickly with less impact than managers in intermediate-or-long-term funds. For an investment where principal may be needed within 3 years or more, consider intermediate-term bond funds.

Most of the return from bonds has come from income over time. It may also be helpful to remember that the majority of the returns from bonds over time have been from interest payments, not changes in prices. Rising rates will ultimately help income-oriented investors, in our view, if they can focus on their time horizons and the combination of income and price-driven return.

Bottom line. For individual investors, we think it'll pay to keep the risk of rising interest rates in mind, but don't let it derail your plans for a sensible allocation to bonds or bond funds. We suggest looking at the risk in the funds you own and make sure they fit your risk tolerance and time horizon.

Source:  Charles Schwab

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Mortgage REIT ETF Yielding 12% Starts Year Strong

The search for yield has investors looking beyond bond and equity dividend ETFs, and into alternative income investment themes such as mortgage real estate investments trusts (REITs). Year-to-date inflows into real estate focused exchange traded funds and mutual funds combined are at about $4 billion.

“The real estate sector is currently benefiting from a number of tailwinds that include the general search for higher yield (REITs pay dividends) and lower volatility, better data emerging from key markets and the U.S. Federal Reserve’s continued focus on the mortgage and housing markets,” Kenneth Rapoza wrote for Forbes.

The iShares Mortgage REIT Capped ETF (NYSE: REM) has started 2013 with an upswing. The ETF has a 30-day SEC yield of nearly 12%. The 0.48% expense ratio is reasonable. The profit comes from the difference between the interest earned on the securities and the interest rate on the short term loans used to buy them. The bullish stance for mortgage REITs is that mortgage rates will go up while short term interest rates stay low. REITs are a hybrid investment that give a bond-like yield with the chance for capital appreciation.

The current low interest rate climate has helped mortgage REITs over the past year, and should continue to do so in 2013. However, as mortgage rates are in a downtrend, the spread is getting smaller, and the yield for REM will be forced lower in response.

Source: Tom Lydon, ETF Trends

REM is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

High-Yield Bond ETF Paying 8% Takes Active Approach

There has been a lot of speculation lately about whether the strong bull run in high-yield corporate bond ETFs is due for a steeper correction with yields sitting near all-time lows. Also, some ETF investors are wondering whether active management can provide a defensive edge versus an index-based approach.

By simply buying a high yield index fund, an investor may end up with too much exposure to lower rated segments of the market. Active management allows for professional management and the ability to focus on certain segments of the market. For investors considering high-yield bond funds, a fund that sticks with higher-rated high yield bonds, and limits exposure to lower-rated bonds could be the best option.

Peritus High Yield (NYSE: HYLD) is an actively managed ETF strategy that debuted in December of 2010.

Instead of following passive benchmarks designed to mirror the U.S. High Yield Corporate market, HYLD employs an actively managed approach that seeks the right mix of individual corporate bond issues.  Peritus takes a value-based, active credit approach to the markets, largely foregoing new issue participation, favoring instead the secondary market where Peritus believes there is less competition and more opportunities for capital gains. Peritus de-emphasizes relative value in favor of long-term, absolute returns.

Source:  Paul Weisbruch, Street One Financial

HYLD is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Why it's not too late to buy stocks

There’s nothing more frustrating than sitting on the sidelines as the stock market churns higher.  Should you put some cash to work with the S&P 500 near its all-time high? Or should you wait for a pullback?

More often than not, investors who try to guess the market’s prevailing winds get blown off course: buying when prices are high and selling when they’re low. Stock investors earned 3.5% a year on average from 1992 to 2012, compared to the S&P 500’s annualized return of 7.8%, according to a 2012 study by the consulting firm Dalbar. The main culprit: poor market timing, according to the study.

Of course, it’s hard to tune out the market chatter, which tends to heighten investor anxiety about what to do. Bears argue stocks are fairly valued or on the pricey side: The S&P 500 is now trading at 17.9 times trailing earnings for the last 12 months, about 15% higher than the average trailing P/E of 15.5 since the 1870s.

It’s also important to remember that stocks are a long-term investment. Many people look at the market through a one-to-two-year lens. But that’s too short a time-frame given the volatility of earnings and potential for market setbacks due to a political or economic crisis.

While stocks move higher over the long-term, they can be highly volatile near-term with swings of 20% or more in any given year. One way to lower your risk of buying right before a downturn is to average into stocks over time. By investing gradually, you can lower your average purchase price should the market head lower.

Also, don’t stray from your long-term investment plan. For example, if you’re in your 40s, you may want a mix of 65% stocks, 30% bonds and 5% cash — a classic balanced portfolio. You’ll need to rebalance periodically, making sure your positions don’t deviate too far from your long-term targets. And most advisers recommend less stock exposure and more fixed income for investors closer to retirement or withdrawing cash from their portfolios. The idea is the mix gradually gets more conservative.

Source:  Daren Fonda,  Fidelity Interactive Content Services

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

 

New Year, New (and Old) Reasons to Like Munis

Despite policy uncertainty and volatility in broader financial markets, municipal bonds managed to keep calm and carry on in 2012, emerging as a fixed income standout with a total return of roughly 7%. Munis' solid showing was not lost on investors, who continued to funnel assets to the market. Can the asset class keep on keeping on in 2013?

BlackRock's Managing Director of Municipal Bonds Group, Peter Hayes says "yes," but advises that investors may need to refocus—and reset their expectations for the asset class.

"...Munis have really exceeded expectations over the past couple of years, and I think the more appropriate question at this juncture might be, "what shouldn't investors expect?" That's not to say the market doesn't have a lot to offer, but investors should be clear that the robust positive returns we saw in 2011 and 2012 are not likely to three-peat. Even with the Fed committed to keeping rates low into 2015, and barring another crisis, muni rates really don't have room to move much lower. That means limited scope for price increases. I would also say investors should not expect stable or one-way price action in 2013. While munis do tend to react to market events with much less drama than taxable bonds or equities, we expect markets to be more volatile overall. Ultimately, we suggest investors focus on municipal bonds for income rather than capital appreciation. This is the market's hallmark and what investors have always appreciated about munis. We believe proper security and sector selection can translate into attractive relative income in an environment where it is very hard to come by..."

"...Taxes were a big source of uncertainty throughout 2012. The January 1 fiscal cliff deal offered clarity on a few, but certainly not all, points. For munis, one of the only tax-advantaged asset classes, the outcome was largely positive. First and foremost, the higher marginal tax rates for high-income earners are clearly favorable for munis, enhancing the value of tax exemption. Secondly, to the extent that other asset classes are negatively affected by tax law changes (e.g., higher dividend and capital gains taxes for those same earners), that too is a relative positive for munis. Likewise, the limitation of itemized deductions for individuals with annual income over $250,000 ($300,000 for couples) also makes munis' tax-exempt nature a draw, allowing investors to keep more of what they earn..."

"...The one pitfall for the asset class is the potential for a change in the treatment of tax exemption. To be clear, we don't think there's any danger of tax exemption being eliminated altogether, but there have been proposals to cap it. We think such a move would be highly unpopular among market participants and politicians and difficult for policymakers to pass. And, as revealed in the fiscal cliff negotiations, compromise in a divided government is very difficult. Any additional conversations around tax reform promise to be just as strained, and that could mean it would be very complicated for certain items (such as tax exemption) to get carved out on the negotiating table. As such, we expect little change. Even if munis were to become entangled in broader tax-reform conversations, we would foresee limited market impact given the offset of higher marginal tax rates and the other points I outlined above..."

"...Munis are paying more income than Treasuries before tax. The upshot is that munis look exceptionally good relative to Treasuries, and we simply see no impetus that is going to push Treasury rates dramatically higher and change this relationship in the near term. Beyond that, munis also look very good relative to corporate bonds, and even better when you factor in the recently approved higher tax rates (highest margin tax rate of 39.6%, plus the 3.8% Medicare tax)..."

Source:  BlackRock

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association