BOSTON - If the key to successful investing is buying low, then an abundance of caution is in order now to rebalance your portfolio.
This year's rally has sent prices for everything from stocks to bonds to gold so high that easy pickings are unusually hard to find.
"There isn't that much to be excited about," said Ben Inker, asset allocation director at GMO, a Boston manager.
If pros such as Inker admit difficulty finding decent investments, it's especially hard for average investors looking to adjust their mix of stocks, bonds, and other assets at year-end. After all, many mistakenly buy when a rally has nearly run its course, or sell in panic near the bottom.
Sure, the market feels safer than it did last winter when almost everything was crashing.
Those with the fortitude to take money off the sidelines to invest then have been richly rewarded. The Standard & Poor's 500 is up more than 60 percent since bottoming out March 9. A broad measure of the bond market, the Barclays Capital U.S. Aggregate Bond Index, is up more than 7 percent since then. Riskier high-yield bonds have surged more than 60 percent.
Even after those gains, nearly everyone agrees the economic recovery is still shaky. So strategists are having a harder time figuring out where to put money to work.
Here is a look at the two most conventional investing options:
Stocks. It wouldn't be a stretch for prices to modestly climb well into 2010. But Inker and Rob Arnott, chairman of Newport Beach, Calif.-based Research Affiliates, suggest more gains might not be sustainable, since this economic recovery is relying on government stimulus and rock-bottom interest rates that can't last forever.
Rising stock prices hinge on Wall Street forecasts for a sharp rebound in corporate profits next year.
Inker says he's nervous about analysts' projections that profit margins will return to mid-2007 levels by the end of 2011.
Bonds. Those shifting into fixed-income investments face headwinds. The biggest is a growing federal deficit that could lead investors - especially big foreign buyers like China - to demand higher premiums to offset the greater risks from buying government bonds. That could lead to interest-rate increases, eventually reawakening long-term bonds' biggest enemy, inflation, which erodes their potential return.
So Inker's favorites are Treasury Inflation-Protected Securities, or TIPS, a common hedge against rising prices.
The only U.S. fixed-income investments Arnott likes now are short-term Treasury bonds. He favors Treasuries with maturities of a few months to a couple of years, expecting inflation won't rise much above its current near-zero level anytime soon.