The Empire's Portfolio: Investing in a Tumultuous Galaxy

A Disturbance in the Force (and the Market)

The Force is strong but so is the undercurrent of economic instability. The recent GDP readings are… disturbing. A contraction of 0.3%? It is as if a million voices cried out in terror and were suddenly silenced. I sense a great disturbance in the galactic market a tremor of uncertainty brought on by the… shall we say 'unconventional' trade policies of our current leadership. The S&P 500's brief descent – a mere taste of the Dark Side's potential. This is no time for complacency; you must feel the Force and more importantly the market trends.

High Yield Bonds: An Illusion Like Sand

Many seek the allure of high yield bonds seduced by their siren song of lucrative returns. Foolish. These bonds are closely aligned with stocks; their prices will plummet as equities fall a fate as predictable as my own turn to the Dark Side. Observe the iShares iBoxx High Yield Corporate Bond ETF (HYG) a pale imitation of true power slipping a mere 0.4% while the S&P 500 lost nearly 0.8%. Such 'gains' are built on sand. "Periods of volatility are painful but good reminders to understand what is under the hood of the portfolio and to stay diversified," some Jedi Master at Morningstar said. Diversification is a path to the Light Side but sometimes you need the focus and power of the Dark Side.

Risk and the Allure of the Dark Side

Investors blinded by greed willingly embraced risk in these turbulent times pouring vast sums of credits – 25.6 billion to be precise – into bank loans and collateralized loan obligation exchange traded funds in the previous year. These institutions lending to companies secured by their assets are playing a dangerous game. And the Collateralized loan obligations (CLOs) are similar in that they are pools of floating rate loans to businesses. Attractive yields some reaching 7% with questionable credit quality may tempt the unwary. However Kathy Jones at Schwab Center for Financial Research warns of small companies with leveraged balance sheets teetering on the brink of collapse. When rates rise the fleeting advantage of floating rates vanishes. Ironic isn’t it?

Investment Grade Plays: The Chosen One?

Yet hope remains. Maulik Bhansali of Allspring Global Investments suggests that attractive opportunities exist in investment grade fixed income potentially yielding 5.5% to 6% with less risk. He speaks of top quality banks fortified against tariff risks. Utilities and health care steady in times of economic darkness trade at cheaper levels holding untold value. Within health care he favors large pharmaceutical names and managed care companies. And then there are agency mortgages and asset backed securities often misaligned when volatility strikes. Such opportunities are rare offering high quality securities with attractive cash flows – a tempting prospect even for a Sith Lord.

Core Bond Funds: A New Hope?

For the investor seeking balance core bond funds may offer solace. As some at Morningstar say: "Core bond portfolios offer a good building block to a fixed income portfolio because you have that broad exposure to the fixed income market". It is crucial to investigate the credit quality and duration of these portfolios to understand their sensitivity to interest rate fluctuations. Seek active managers tested by time and volatility. A good manager is like a good pilot guiding you through the asteroid field of the market.

Embrace the Force (and Prudence)

In these times of turmoil remember the words of Yoda: "Fear is the path to the dark side. Fear leads to anger. Anger leads to hate. Hate leads to suffering." Do not succumb to fear. Instead embrace prudence diversification and the wisdom of seasoned analysts. The Force will be with you… but a well balanced portfolio won't hurt either.