Financial Expert to Investors: Be Careful, You're in a Minefield

Wednesday, 23 Apr 2014 07:38 PM

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Investors should be cautious as they try to navigate the current economic minefield, one financial expert says.

David Scranton, CEO and founder of Advisors' Academy, told J.D. Hayworth and John Bachman on "America's Forum" on Newsmax TV that with another correction in the stock market likely still on the horizon, careful choices about where to put your money must be made.

"We're at a record high in the stock market," Scranton said Wednesday, "and one thing we know from 200 years of stock market history is that whenever we've gotten in a secular bear market, we've always had at least three or more major drops in that secular bear market, and this time we've only had two. So, in many ways, fixed income's actually the safer bet than equities at this point."

Scranton said that investors in the bond market might consider individual bonds over bond funds because of their relative stability.

"Right now there is a big difference [between the two]," Scranton said. "When you buy individual bonds, you have two important guarantees. First you have a guaranteed interest rate for the life of the bond. Second, when that bond matures, you're guaranteed to get your full face value back.

"That assumes of course there have been no defaults. Bond mutual funds, however, are a different animal. When you buy a bond mutual fund, the interest rates can fluctuate and there is no data which bond funds mature, which means that they have additional risks.

"By going from bonds to bond funds, what you've really done is you've lost the two important guarantees that individual bonds have.

"You need to be careful and make sure you're choosing bonds that are more secure," Scranton said. "Obviously, Detroit tells us a lot about what's been happening recently. If you're looking at municipalities, obviously you want to focus perhaps more heavily on general obligation bonds, bonds that are backed by the full faith and credit of that municipality.

Editor's Note: Seniors Scoop Up Unclaimed $20,500 Checks? (See if You qualify)

"The biggest fear right now with bonds is that people are concerned what happens as the Federal Reserve keeps backing off of QE3 and takes their foot slowly off the accelerator, how that would affect interest rates, and of course if interest rates go up, bond values drop.

"For the last 33 years we've had a declining overall interest rate environment, which means bond funds as well as individual bonds have had an incredible tailwind. But if interest rates now are bottomed out and maybe poised to start declining ever so slightly, that tailwind could easily turn into a headwind."

When it comes to interest rates, Scranton says that new Federal Reserve Chairwoman Janet Yellen will take an approach similar to that of her predecessor, Ben Bernanke, on quantitative easing.

"I don't expect to see anything dramatically different between the two," Scranton said. "However, although they want to keep their foot on the gas and on the pedal, on the accelerator, and do everything they can to keep the economy going, the reality, though, is that it's become too politically unpopular to continue with this QE3 or this quantitative easing, and that's why Ben Bernanke made the commitment to start to pull back on this year in 2014 and Janet Yellen has indeed followed suit."

Scranton said that he does not expect a huge increase in interest rates coming down the line.

"Before QE3 began, the 10-year treasury rate was close to 4 percent and now it's 2.7 percent," he said. "So, we might be looking at only a 1 percent increase. In order to trigger hyperinflation, we actually have to have a significant increase in demand for goods and services, and right now we're not seeing that.

"In fact, there are many economists right now that are on the side of the fence saying we could be in a deflationary environment, coming up as we are on an inflationary environment."

Scranton added that despite gold's falling to its lowest prices since February, he does not recommend jumping into that market looking for a quick buck.

"If you're going to be in equities, yes, precious metals are much like equities in that typically you don't buy them for income, you buy them for potential capital appreciation," he said.

"That's of course where fixed income's different. You buy fixed income for current income. If you're going to have a portfolio with a lot of equities, clearly integrating some precious metals will give you some diversification so that if one zigs, hopefully the other zags."

Editor's Note: Seniors Scoop Up Unclaimed $20,500 Checks? (See if You qualify)

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