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T. Rowe: Low rates are market's biggest 'anomaly'

Associated Press Modified: November 29, 2012 at 12:58 pm •  Published: November 29, 2012

It's not all about the "fiscal cliff."

That's a refreshing sentiment while stock markets are being held in thrall by every comment from lawmakers in Washington on the state of budget negotiations.

If no deal on the budget is reached by the end of the year, huge tax increases and spending cuts will start to take effect Jan. 1. Economists say those measures could push the U.S. back into recession. Yet Bill Stromberg, director of global equity and global equity research at Baltimore, Md.-based T. Rowe Price Group Inc., says that the "cliff" shouldn't be investors' main focus.

"Artificially low" interest rates are the biggest "anomaly," in financial markets today, says Stromberg. When borrowing rates fall, bond prices rise, and that has created a surge of cash flooding into bond funds. Investors have added $224 billion to taxable-bond funds in the first 10 months of the year, while withdrawing a net $85 billion from U.S. stock funds, according to research from Morningstar.

People have been "pouring their money into bond funds," says Stromberg. "They have to be aware that, at some point, interest rates will go up and there will be losses."

Stromberg advises investors to build a diversified portfolio. Not only should they split their funds between stocks and bonds but, they should also consider investing in other regions outside the U.S., in particular emerging markets.

Here are some excerpts from the interview with Stromberg:

Q: How should investors think about the fiscal cliff?

A: I personally don't think average investors should be structuring their portfolio around the idea of a short-term deadline in the market, at all. Their long-term asset allocation and choice of investments should be based on much longer-term horizons.

Q: How will any changes in the dividend tax rate impact investor behavior?

A: People will decide that they still need income. The available income choices in the fixed-income markets are less appealing because rates have come down as much as they have. Income-orientated stocks will remain a reasonable choice for their investment dollar and people are going to continue to own them. A lot of stocks are owned in tax-protected IRAs or in retirement accounts that are not taxed. So those folks will see no change.

IRAs, 401Ks, tax deferred savings plans are even more beneficial when tax rates go up. So, hopefully, you will see more people maximizing their contribution to those tax-protected vehicles than ever.

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