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How to Play It Conservative With the Market at New Highs


ETFs may be the key to a balanced portfolio.

Last week I wrote an article that focused on how too much cash was hurting your returns as stocks, bonds, and even commodities have strengthened considerably this year. Subsequently, we have seen further reinforcement in the SPDR S&P 500 ETF (NYSEARCA:SPY) which ultimately pushed the bellwether index to new all-time highs on Monday morning. Since SPY bottomed on February 3, we have seen a huge rush of dip buyers step in, which has resulted in positive returns in 10 out of the last 14 trading sessions.

Investors that have hung on to their equity positions have largely been rewarded with further gains as an extension of the 2013 rally. The "buy the dip" mentality appears to still be firmly cemented in place and has continued to frustrate bears at every turn. Those with excess cash on the sidelines are probably starting to get even more anxious as the psychology of getting left behind starts to break down their conservative resolve.

So the question now becomes -- is it worth the risk to enter the market near its highs, or should you continue to hold out for lower prices?

There is no denying that the trend of the market is firmly with the bulls. Nearly every major domestic stock index is breaking out to new highs and is firmly above their 50- and 200-day moving averages. This is also being confirmed with excellent relative strength in developed international markets via the iShares MSCI EAFE ETF (NYSEARCA:EFA). From a technical standpoint, higher prices seem to be the direction that we are headed.

However, throwing caution to the wind and adding new money at inopportune moments can often be a recipe for disaster. Especially when your likely response is to try to pick up aggressive positions to make up for lost time or catch up with the pack. One of the easiest ways to completely destroy your capital and confidence is to jump into stocks near an inflection point and quickly see a 5-10% drop in value.

If your focus is on a long-term investment horizon and you have the stomach for volatility, then your entry point is not likely to matter in the next week or two. However, the majority of investors I come into contact with are more conservative-minded individuals who are concerned with capital preservation and steady growth. That is why it may make sense at this juncture to take a more cautious approach to putting new cash to work.

One way to do that is by pairing equity and fixed income positions to balance your holdings and offset potential volatility. One example might be to purchase the iShares MSCI US Minimum Volatility ETF (NYSEARCA:USMV) as well as the PIMCO Total Return ETF (NYSEARCA:BOND) with equal weightings. If stocks begin to weaken, we will likely see a flight to quality in fixed income that boosts the price of BOND.

Another guarded approach might be to own a multi-asset ETF with an overweight exposure to fixed income such as the iShares Conservative Allocation ETF (NYSEARCA:AOK). This ETF has approximately 66% of the portfolio allocated to bonds with 34% designated to stocks and pays a yield of 2.16%.

While neither of these strategies seems very sexy at face value, both will allow you to participate in future gains with less risk than a traditional long-only equity strategy. The key to success is to be disciplined enough to actively participate in the market while implementing an asset-allocation strategy that allows you to sleep well at night according to your risk tolerance.

Read more from David Fabian, Managing Partner at FMD Capital Management:

VIDEO: February 2014 Chart Review

How to Maximize Your Income Portfolio Using A Four-Sleeve Approach

A High-Yield Play on Emerging Markets

Twitter: @fabiancapital
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Positions in USMV and AOK.
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