How to invest wisely in today’s market

By Elliot Raphaelson
Posted on March 23, 2017

Many readers have written asking for advice about how to invest for consistent income in 2017 with minimal risk.

As I have emphasized many times, it’s impossible to reap high returns on your investments — whether it’s in the form of income or equity appreciation — without assuming some risk.

That being said, it is possible to anticipate likely occurrences in 2017 and make investments taking these into account.

Rising interest rates

What is likely? It is likely that the Federal Reserve will increase short-term interest rates a few times in 2017. Most experts following the Fed agree.

If that is the case, then bond markets will be volatile, and some long-term investments — such as long-term Treasury bonds — will likely decrease in value, even if only in the short term.

Accordingly, I would caution investors not to have significant holdings in long-term bonds, especially if those holdings represent money you will need in 2017.

What investments would benefit from this scenario? Treasury inflation-protected securities (TIPS), or mutual funds or ETFs investing in them, should do well. You won’t receive a great deal of income or capital gains in these investments, but you won’t be taking a great deal of risk, either.

Other investments that should do reasonably well in this scenario are investments in high-quality bank loan portfolios whose income is based on variable interest rates. If the Fed does increase rates, then the return on those loans will increase accordingly.

Will stock investments do better than bonds in 2017? No one can be sure. There are reasons to believe that corporate profitability will increase because it is likely that Congress will enact legislation that will reduce the corporate tax rate.

The incoming administration campaigned on that basis, and most members of the incoming Congress seem to agree.

However, common stock prices are at a pretty high level, in terms of price-earnings ratios, so there is no guarantee that stock prices will continue to increase in 2017.

As I have said many times, there are time frames in which bonds outperform stocks and vice versa, and no expert is right all the time.

That is why for the last 20 years in my own retirement I have maintained a balanced portfolio of stocks and bonds. I don’t pretend to know in which year one or the other category of investment will do better.

What stock sectors are best?

As for equities, which sectors are better to invest in? Many of the experts believe that when interest rates are expected to increase, the banking sector does well. However, bank stocks have already increased in value recently, so there is no guarantee that they will outperform other sectors in 2017.

I try not to concentrate my investments in one or two sectors, because it is difficult to predict which patterns will persist.

That is why I think it is prudent to invest in low-cost, well-diversified index mutual funds or ETFs. For example, I like the Vanguard Total Stock Market Index Fund (VTSAX) because of its low costs and broad base of investments. Other fund families such as Fidelity and T. Rowe Price have similar offerings.

I also like investing in funds that have a long history of increasing dividends and low costs. For this reason, for many years I have invested in the Vanguard Dividend Appreciation Index Fund (VDADX).

Bond funds to consider

As for bond investments, I generally prefer investments in intermediate-term funds, especially when it’s likely that interest rates will increase.

Two of my favorite funds for long-term investors are the Vanguard Intermediate-Term Investment Grade Fund (VFIDX) and the Vanguard High Yield Corporate Fund (VMEAX).

There is more risk in high-yield funds, but I have found that on a long-term basis, it is worth the higher risk.

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.