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Hedging Against Inflated Valuations

July 22, 2014

As the stock market continues to climb new heights, investors are a little skeptical about how long the party will last. As stocks reach their value, and many that are overvalued, it woud be wise to seek other investment vehicles as a means of hedging a stock portfolio and preserving capital. Many investors are turning to bond funds.

Bond funds allow investors to diversify their portfolio in two ways. One is by holding an asset that has a low correlation to a portfolio of stocks. The other way is that bond funds hold multiple bonds within the fund, decreasing the affects of default, inflation, and interest rate risk. Of course, not all of these risks are diversified away, since some bond funds may hold securities that have the same maturity date, which would still expose them to interest rate risk. Of course we know the benefits of having a bond fund and the diversification we receive when we invest in one. We also know about the consistent stream of income we can receive from our bond fund. But have we actually looked to do so? Or have we been too enamored with the ever increasing growth, and overvaluation, of the stock market?

Below is a video of some bond funds for your consideration. It may be a good idea to allocate money into one of these positions before a major correction hits. For those who want to take a more active approach in diversifying their portfolio, I have created a portfolio with some closed-end bond funds trading below net asset value. The portfolio pays a distribution of 8.4% and is comprised of global, municipal, and high yield CEFs. Whatever you decide to do, make sure your all of your eggs aren't in the stock market.

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