ETF Expert

Prior to the start of 2008, you read a lot more articles about the stock market's 9.5%-10% historical returns. It's hard to find a middle class citizen that believes that this is possible anymore.

Yet one of the most common errors of presentation is the reality that 40% of the stock market's historical return came from dividends. So anyone that wishes for a happy 2009 better start looking to bolster their portfolio with a bit of the forgotten fruit.

At the same time, a worldwide recession makes an all-out stock allocation exceptionally risky… even if there's a strong likelihood of a bear rally and/or emerging bull. So you'd have to buffer your portfolio with winning income producers. They too have a reasonable shot at appreciation, but your reason for choosing them would be for the predictable cash flow.

Recognizing that I never buy-n-hold, I still enjoy offering lazy portfolios to my readers. It follows that… if I were serving pizza at a playoff gathering… this might be the best 8-piece portfolio around:

The one thing that you can count on with this portfolio is the cash flow. Although price movement of the securities will move yield around in the upcoming year, it is a relatively safe and predictable income stream. In other words, the combination of these fixed and variable assets will produce 5% in income. (We're talking about an income stream that is 10x that of a 1-year treasury bond!!!)

Obviously, one cannot count on fair value estimates or projected capital appreciation, even when the fair value estimates are relatively tame. Why not? Because credit is still tight, home prices are still falling, wars are raging, deflation, inflation, you name it!

All that said, there's more than 9 trillion held in cash equivalents at this point, and that's 3/4 of the market value of all U.S companies combined. That ratio hasn't existed since the 1990 recession. Moreover, it is nearly twice as much as what was held in cash by U.S. investors just 1 year earlier, and that's the biggest jump to cash since the Fed began keeping track over 50 years ago.

In other words, when investors lose enough faith (if they haven't already), dollars move almost entirely into cash holdings. That's about when the smarter money moves back into stocks. The problem is, it could happen in 1 day, 1 month, 3 months 6 months or a year… and nobody but nobody knows for certain.

What I do know is that one increases his/her buffer when dividends/interest can be relied upon. And for 5%, this is a reasonable portfolio for 2009. (Note: Read more about investment grade bonds via LQD here, or preferred shares vis-a-vis PFF here, or telecom through IXP right here!)

Remember, I still consider this a moderately assertive allocation. This isn't going to be for the "nothing-at-risk" crowd.

Still, I believe the yield alone should help to offset the fears of putting too much of one's principal into the markets. What's more, under less economically woeful times, few would regard a 37% bond allocation (i.e., LQD, BWX, EMB) as too risky!

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.