Umbrella of Alternatives Can Keep You From Getting Soaked
Forecasts for US stocks present a cloudy picture. Here's where you can go to stay out of a storm.
| NEW YORK
When the winds start howling and the rain is torrential, summer or not, it makes sense to have a good umbrella on hand.
Summer squalls in the investment markets can wield as many punches as winter storms, and investors need to make certain they have a protective investment plan.
"People should be thinking of umbrellas right now," says Louis Altfest, president of Louis Altfest & Company, a financial consulting firm here. "When a respected magazine such as the Economist has a picture of the Statue of Liberty with a speculative bubble around it, it's time to be thinking about becoming a little more conservative with your investment money," he says.
Financial advisers say that in stock markets like these, you definitely want investments that are diversified. From day to day, different parts of the market are being hurt. Bank stocks will be hammered one day, technical stocks another, and small company stocks will drop the following week.
Investors can seek shelter from a broad range of options. Among them:
Sometimes called "hybrid" or "balanced" mutual funds, they invest in a variety of securities - including corporate bonds, convertible securities, blue-chip stocks, value stocks, and growth stocks.
"Having at least a portion of your assets in an all-weather fund can be pretty important" during a period of volatility, says Sheldon Jacobs, editor of the No-Load Fund Investor newsletter, published in Irvington-on-Hudson, N.Y.
"Obviously, if we were at the bottom of a bear market, then you could have all your money in growth stocks. But we are not there," he says. So with stock markets still growing, yet many stocks considered somewhat expensive, "you need an exposure to a mix of bonds, stocks, and cash," he says.
Berger Balanced is currently the top hybrid fund tracked by Morningstar Inc., a financial-information firm in Chicago. Berger is currently 45 percent in stocks, 44 percent in bonds, and 11 percent in cash. The stock portion was increased a tad from last month, based on a perception of potential gains in equities, says a fund spokesman.
The fund (800-333-1001: $2,000 minimum) is up 18.9 percent, year-to-date, besting the 14..78 percent for the Standard & Poor's 500 Index.
Mr. Jacobs also suggests that investors put together their own all-weather portfolios. Balance a strong equity-income fund with a solid municipal bond fund, he says. That duplicates a hybrid fund but gives you more control.
Two types: "contrarian" funds, such as the Robertson Stephens Contrarian Fund, and "market neutral" funds that take special positions in the market, such as buying companies that have hidden value.
Contrarian funds seek to go up when the market goes down. But they often perform poorly in a strong market, Mr. Jacobs notes. Robertson Stephens, for example, is down 3 percent for the year.
Market-neutral funds can be tricky and are probably for more-sophisticated investors. Still, Altfest likes the Barr Rosenberg Market Neutral Fund, designed to outperform the three-month Treasury bill.
Through April, the fund returned 1.4 percent, compared with a return of 1.3 percent for the three-month T-bill, according to a fund spokesman. (800-447-3332: $2,500 minimum for regular accounts; $2,000 for IRAs.)
Bonds and cash
Don't overlook them. Altfest likes convertible bonds, which can be converted to common stock. Jacobs likes municipal bonds.
Money-market funds, meantime, currently yield about 5 percent and merit a portion of your assets, Jacobs says.
When markets act uncertain, you shouldn't
* Remember that you're in this for the long haul, Studies show that stocks outperform other investments over time.
* Don't try to time market ups and downs. Timing rarely produces better results than leaving a stock or mutual fund portfolio intact. Dollar cost averaging - investing a set amount of money, regularly - works best when markets are falling. Stick to it. Markets inevitably rebound.
* If stocks fall more than 10 percent, weigh some alternatives. And a 20 percent drop signals a bear market. At that point, consider whether you can absorb additional losses. From 1973-'74, for example, the Dow lost over 45 percent.
* Watch several indexes for broader trends.
* Combine a money market fund with brokerage or mutual fund accounts. So you can shift into it via phone or E-mail.