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Kent Thune

How to Play the 'Great Rotation' With Mutual Funds

By February 24, 2013

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If you haven't heard of The Great Rotation, you may congratulate yourself for not paying too close attention to financial media.  However, you don't need to be a market timer or active trader to do a bit of rotation yourself and take advantage of this investment phenomenon.

The Flight to Equities - 2013

But first you may ask yourself, What is The Great Rotation? In simple terminology, it refers to the transition (rotation) out of bonds and bond mutual funds into stocks and stock mutual funds. The reason for this rotation is due to the extremely low yields for bonds and the presumed end to a 20-year bull market for bond prices, which move in opposite direction of yields.  Now that the Federal Reserve has made clear they will not continue the purchase of Treasuries (the so-called "Quantitative Easing" or QE) beyond 2013, bond prices could begin falling. Therefore investors are finding stocks more attractive than bonds and thus the "flight to equities."

In translation, bond investors could not only earn next to nothing on interest payments but could see declines in value (or what some of you might call "losses").  Lose money with bonds? Yes, it does happen!  With that said, I must add here that investors do not actually realize a loss or gain until their security is sold.

How to Invest for The Great Rotation

But what can the long-term investor do? You want to have a balanced and diversified portfolio but you don't want to engage in absolute market timing.  If you need income, you might take a look at dividend mutual funds, which have higher yields than bonds these days.  Also, be sure you do not have heavy exposure to long-term bond funds, which are more sensitive to rising interest rates and hence their respective prices fall faster and harder.  Check my article on best bond funds in 2013, if you want to maintain exposure to bonds.  You may also want to diversify with sectors and check my article on Best and Worst Sectors in 2013.

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