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With the media talking about a Federal Reserve tapering in its support for financial markets, many in the investment community are considering an immediate change in their investment strategy. Of course, volatility in markets often calls for ongoing portfolio adjustments, making the services of a multiple-asset strategy invaluable. But if such a strategy has already set up the portfolio's basic structure, it would almost surely be premature to make a major restructuring now. The Fed has contemplated only the smallest of shifts, and it has not even spoken of an outright policy tightening.
Meanwhile, the economic, financial, and valuation fundamentals remain much as they were. Eventually, of course, the progress of the economic and investment cycle, as well as further Fed action, will demand a change in investment strategies. Investors then would likely benefit from an asset allocation fund and the assistance of an asset allocation strategist.
Presently, the Fed is pouring liquidity on financial markets, buying $85 billion a month in Treasury and mortgage-backed securities. Even if in the next year the Fed takes subsequent tapering steps, it likely will do so along the gentlest of glide paths and according to steps long since laid out by Fed chairman Ben Bernanke—ones that his successor will almost surely feel bound to follow. The Fed does not contemplate any interest-rate increase until the final stages of its tapering program, probably not until 2015, at the earliest, and, even then, the actions would fall far short of outright tightening.
Nevertheless, in the fullness of time, policy and fundamental changes will call for an alternation in investment strategy. Stocks and other risk assets likely will become fully valued, as they are not yet. The Fed will advance into the later stages of its policy shift. Investors, as such landmark events approach, will likely need to shift toward more conservative portfolio postures. How rapidly they will need to make such moves will depend on the extent to which equities and other risk assets realize their potential, how rapidly the Fed feels obliged to make its last changes, and a host of other considerations, some purely financial, some economic, some political, and some foreign.
Since at this juncture the possibilities of this future array of influences verges on the infinite, it is impossible today to set these subsequent strategy adjustments, except in the most general terms. The specific changes and their timing will depend on a careful weighing of all these potential influences as they develop; their nature, and the speed at which they are occurring. That effort, if done correctly, will require the attention of a well-trained team. It is not the sort of thing—to use the words of the old television warning—that one should "try at home." This is when the benefits of a good allocation-strategy fund—with an experienced team of investment experts in multiple asset classes—becomes apparent.
Read Milton Ezrati's Economic Insights every week at lordabbett.com/investor.
The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular countries and/or sectors in the economy.
Asset allocation does not guarantee a profit or protect against loss in declining markets.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.