What’s not to like? Blue Skies, Gentle Waves, A Beach 🙂
However, that was most certainly not 2022. In fact, last year, except for Cash, every major asset class I can think of got hammered. No matter where you went, nothing worked. But, everyone needs to invest to a certain extent, whether for capital appreciation or income. So where can one get idyllic, risk-adjusted investment returns, as we stare down the barrel of an economic slowdown?
Fixed Income. 1st Favorite: US Treasuries. The Federal Reserve has told you about it’s mission to throttle inflation and they have more interest rates hikes in store and then will leave them there, for most of 2023, in my opinion. Thus, stash you cash, earn a decent rate of return and most importantly, preserve your capital. It is time to play defense; You will have plenty of time to play offense in a risk-on environment, just not anytime soon.
2nd Favorite: Below Par, Close to Potential Call Preferred Stocks. Imagine buying for less than 100 cents on the dollar, getting a quarterly dividend (15% tax-advantaged works nice), then watching your underlying price appreciate as two things happen: Interest rates make their U-turn and start going down (Early to Mid-2024) AND the time compression of nearing and reaching the PCD on your investment. The issuer will call away/redeem higher interest paying preferred stocks, just like refinancing your home mortgage to a lower rate. In summary, you buy at a discount, get paid quarterly to wait, then get 100 cents on the dollar; Nice, risk-adjusted total return.
Even though stock valuations have come down, chances are very good they will compress further, as the 2022 Federal Reserve interest rate hikes AND Quantitative Tightening begin to bite. Add in layoffs that are an almost daily occurrence, record high credit balances, domestic “classified” dysfunction, international flashpoints of various degrees and you are left with great uncertainty. Not a favorable investment environment, for now. So clip interest coupons and paradise will not be lost, but found.