With the summer stock doldrums here, it is best not to be 100 percent in the stock market, Carol Pepper, chief executive officer of Pepper International, told Yahoo.
Pepper manages money for people with more than $100 million in net worth and noted that these investors are making sure they have enough in fixed income.
"They're having at least 30 to 40 percent in short-term corporate bonds because unlike governments that are broke, corporations still have money," she said.
While lower-net-worth investors may not make as much as do the high-net-worth investors with corporate bonds yielding approximately 5 percent, Pepper said it is better than losing money.
Besides not being fully invested in the stock market, she recommended looking for things that have income and cash flow that are not affected only by the stock market.
“I love exchange-traded funds (ETFs) for the average person because they have low cost, high transparency and you can trade them every day and you can follow what they are doing,” she told Yahoo.
When researching an ETF to invest in, Pepper said to only invest in ones that are very large, liquid and unlevered.
“If an ETF is not at least $1 billion, stay away from it,” she noted. “There are plenty of big ones.”
Pepper recommends the iShares Dow Jones Select Dividend Index (DVY), which includes high-yield dividend stocks. DVY is the largest of the dividend ETFs with $10.29 billion in net assets, according to Seeking Alpha.
"In a weak market the market likes cash flow and that's what you get out of dividend stocks," she stated.
Although there is the possibility of companies using money to institute stock buybacks instead of paying dividends because of the looming fiscal cliff, she noted that dividends will win out.
“Companies understand they are much more rewarded when they pay dividends in this market. That’s generally true across the board,” Pepper said. “And they want the stock price to go up. The CEOs want to buy those yachts and those jets. So they are going to keep the dividend there.”
Pepper also believes banks are going to reintroduce dividends.
“Banks used to be great dividend payers. And they were forced to get rid of all of the dividends because of the crisis,” she said. “Within a year or so, you are going to see them start to pay dividends again. So holding DVY, you’ll see those come in to DVY.”
In addition, Pepper noted that utilities are safe in a risky market. She likes the SPDR Utilities Select Sector ETF (XLU), which has $6.37 billion in total assets.
"People have to have electricity, they're always keeping the lights on. These are basic, basic things, but in a risky market basic works for you," she said.
While there will be some uncertainty in the market until the election, Pepper believes the Fed is going to do something in the fall.
“And we could have a nice fall rally if we get through the summer without any major disasters," she said.
Until then, it is best to keep your asset allocation where it is.
“You want to have an asset allocation that you stick with through ups and downs. So hopefully you stay where you are,” she noted.
“For example, if you have let’s say 40 or 50 percent in equities, don’t take the risk off necessarily but understand that you are going to have to live through probably a couple of ugly months. And then by the fall, you’ll be rewarded for holding those positions,” Pepper predicted.
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