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By Jason Stipp and Christine Benz | 01-08-2014 12:00 AM

Feeling a Tactical Twitch?

Strong markets can coax investors away from their strategic asset allocation plans, but being tactical successfully is much easier said than done.

Jason Stipp: I'm Jason Stipp for Morningstar.

Stocks are on a roll, bonds are still under a cloud, and investors might be feeling pretty good. But what should that mean for their portfolio plans? Well, maybe not that much.

Here with me to explain is our director of personal finance Christine Benz.

Christine, thanks for joining me.

Christine Benz: Jason, it's great to be here.

Stipp: We do know that investors are probably feeling pretty good after 2013, but we also have some data that indicates that they're feeling pretty good and making some portfolio moves because of that. What does the data tell us about where investors' heads might be right now?

Benz: We regularly monitor fund flows. We're able to see flows into mutual funds and exchange-traded funds as well as flows out of those products. What we see is that investors seemed to be in risk-on mode. So the market has been pretty good when you look over the past five years, very strong returns across a number of asset classes. In general, investors appear to be comfortable taking risks.

We've seen very strong flows into equity funds at large, especially into some of the riskier categories. We've seen very strong flows into international funds, and emerging-markets funds specifically have seen some of the biggest flows across equity funds.

We've also seen investors appear to be feeling pretty comfy with risk in the bond world as well. Investors are shunning interest-rate risk. They're selling long duration bonds, they're selling intermediate-term high-quality bonds that they perceive to be interest-rate sensitive, but they're buying more credit-sensitive bonds. The bank-loan category, for example, has really amazed us all in terms of its asset inflows. It's gathered something like $60 billion over the past year. The nontraditional bond category, which is a newer category for us, has seen over $50 billion in new flows over the past year. High yield hasn't seen quite as much in terms of new inflows, but inflows were still positive in 2013 as well.

Stipp: If we've seen money going into some of these areas--some of them even newer areas or more esoteric areas like bank loans--that's going to change the composition of people's portfolios. We think long-term investors are in strategic portfolios. They find a good asset allocation. They rebalance back to that allocation. But if we see people going into some of these other areas, how does that mesh or not mesh with being a strategic investor?

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