today GNYDM 25 Nov

finance 19Greater New York Dental Meeting — Nov. 25, 2012 AD By David Keator, Keator Group n During the last 30 years, we have seen investment “bubbles” of differ- ent varieties that are nothing more than extreme investment swings based on a myriad of factors. Internet, commodityandrealestatebubbles,to namejustafew,haveallcausedmany investors anxiety. The primary driv- ers of these inflated values are based upon momentum and greed. It comes from a feeling that everyone else is making money and the investor is missing out. It’s OK to be an optimist, but it’s a good idea to be watchful when every- one is an optimist. Beware of crowds at the extreme. When we see the type of exuberance that typically leads to inflated values, we believe it’s a good time to take a breath and put up a safety net. Last year, many economists and market analysts warned bond prices woulddeclineandtheresultwouldbe higher interest rates. As a result, the conventional wisdom was to shorten the duration of a fixed income portfo- lio in an attempt to create a bunker. Because we have enjoyed unprec- edented and historically low yields (high-bond prices), many heeded this call. Some saw a bond “bubble,” and it was time to take profits. Last spring, the five-year treasury yield was 2.23 percent. Four months later, the five-year yield was 1.48 percent. When prices on bonds rise, their yields typically fall. That means the short-term investment call was premature, giving credence to mar- ket calls being more art than science. So, what is being done with all of the cash that is being held? Investors are searching for a place to invest it. Short treasury yields (one year) fell from .30 basis points (one- third of 1 percent) to .16 basis points (one-sixth of 1 percent) between March 2010 and July 2011. This has caused investors to hunt for yield and seek higher income potential from more aggressive investments. Theoretically,thehigherthepoten- tial yield, the greater the risk, but the appetite for higher yield has been strong and that has the potential to cause a bubble in the high-yield mar- ket just as high demand for Internet stocks caused unrealistic valuations in the late 1990s. Buyer beware: A fixed-income investment paying a 5 percent yield might not seem risky on face value, but if it is compared to the relative security of treasuries, then you can easilyseeapotentialforadisconnect. So,backtoourtitle:“Whathappens next?” The next step for each investor is to evaluate where your safety net is. Do you have an investment plan? Have you figured out your risk pro- file and adjusted your investments accordingly? Do you have a bunker? If the market drops by 10 to 20 percent, do you have enough cash and liquid investments as a reserve so that you can avoid selling under- valued assets to meet emergency or even day-to-day needs? Are you prop- erly diversified? It is painful to see CDs and short- term treasuries paying less than 1 percent. If it is part of your bunker, you have to stay disciplined. If your investment time frame is short, you must be very careful of volatility. With a longer time frame, you could possibly take advantage of high- quality stocks with dividend poten- tial or short-term corporate bonds. Remember, we are in a global econ- omy, so do not overlook investment opportunities throughout the world. We believe one of the safest ways to invest is with a long-term horizon. Editor’s note: The opinions expressedherearethoseoftheauthor and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitationoranoffertobuyanysecu- rity or instrument or to participate in any trading strategy. Additional informationisavailableuponrequest. What happens next? About the author David Keator is a partner at Keator Group. Contact him at (877) 532-8671.