Two Investment Themes to Take to the Bank

As I've said on numerous occasions, it isn't necessary—in fact, it's futile—to pretend that you know exactly how the drama of the financial markets will unfold in the months ahead. Rather, you should focus on the relatively few things you do know with a fair degree of certainty, and map out your strategy from there. Here are two themes I believe we can count on to guide us for the rest of 2014:

The Federal Reserve will remain in easy-money mode.

Ever since May 2013, when Ben Bernanke first broached the topic of "tapering" the Fed's enormous purchases of bonds and mortgages, investors around the world have been casting fearful glances over their shoulders. Relax, I say! Janet Yellen, Bernanke's newly minted successor as Fed chair, is a confirmed monetary dove. She has no intention of tightening credit anytime soon.

As long as the money spigot stays wide open, we should continue to give the benefit of the doubt to the stock market's bull trend, while expecting periodic "corrections" of 5%–10% in the headline indexes. If you're underweighted in equities, relative to our recommended 57% allocation, your optimal strategy is to build up your stake in regular increments over a span of four to six months. Should the market suddenly treat us to a sharp pullback, I'll advise you (via my twice-weekly Richard's Journal blogs) to accelerate your purchases.

Asset classes that suffered in the "taper tantrum" will rebound.

Overreactions are hard-wired into Wall Street's genes. By making clear its plans to keep short-term money market rates pinned near zero well into 2015 (and historically low after that), the Federal Reserve has given bargain hunters the official go-ahead to tiptoe back into investments that got dumped, willy-nilly, during last year's "taper tantrum."

Bonds and preferred stocks, hammered in 2013, stand to benefit now from the reverse flow. Don't be surprised if the high-yielding bonds of emerging markets snap back furthest, since they took the hardest hit last year.

Investors with a taste for common stocks will also find it hard to ignore the blue-light specials that have popped up in certain corners of the market. Asia, for example—a part of the world that largely missed out on the 2013 equity feast. If the U.S. economic expansion keeps rumbling along, as now seems likely, imports from Asia will pick up, stimulating the region's economies.

At home, I'm keen on real estate investment trusts (REITs), a stock group that limped through 2013 despite solid growth in earnings and dividends. For the same reasons, my favorite MLPs and utilities in the model portfolio offer excellent value.

Yours for Profitable Investing,

Richard E. Band