Colby is Portfolio Manager/Municipal Bond ETFs with more than 30 years of fixed income experience.
If you have not asked yourself this question, then you may either be blissfully unaware of the cacophony raised as investors rush out the exit marked "equity" based on fund flow data from Morningstar, or your expectations might be so low for investment returns that you've turned to watching re-runs of AMC's Mad Men. With everything seemingly in freefall – including yields – I offer my opinion as follows: Do nothing at your own peril. To default to cash means paying someone else for the opportunity to hold your money, for nothing. With the Fed signaling that rates are likely to remain low for some time, one needs to choose an investment strategy that provides liquidity, generates an income stream and avoids the clouds of uncertainty through diversification.
In my view, fund structures such as ETFs may achieve these points. Offered in a wide variety of strategies, investors have the potential to match their tolerance for credit and/or interest rate risk. For example, municipal bond ETFs with duration targets such as short, intermediate or long. Currently municipal bonds offer taxable-equivalent returns greater than those offered in the U.S. Treasury or U.S. corporate bond markets1.
Despite the offering of Warren Buffett on the topic of diversification when he said, "Put all your eggs in one basket and then watch that basket very carefully," I believe most investors may not have the luxury of Buffett's expertise. Diversification in the municipal world seeks to protect against the unknowable, and a way to perhaps keep those eggs from cracking.
1Source: Barclays Municipal Credit Research, May 2012.
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