6/3/2013 6:45 PM ET|
Beat this market's 7 big fears
Yes, this hot market carries risks. But instead of running scared, take steps to cushion your portfolio against the ones that worry you most.
It has taken four years for stocks to recover from their 2009 lows. So, can you rest easy?
Hardly. With markets trading at warp speed, a new shock could vaporize a big chunk of your hard-won equity gains in minutes.
Consider how the market might react to a sudden war or major natural disaster. Could your portfolio handle that? How about another flare-up of the eurozone fiscal crisis? Or the long-feared bump in interest rates? Even something as relatively mild as a stock-market correction could do real damage, as could the current no-yield, fixed-income environment if it stretches on for years.
Other than holding a lot of cash -- which pays next to nothing and will lose value once you factor in inflation -- there isn't any easy way of hedging against every conceivable danger. But some mutual-fund and exchange-traded-fund strategies could cushion the impact while keeping you in the game if markets continue to rally.
Certain equity funds, for instance, might make your stockholdings more resilient. Some types of bond funds could be a safer bet in an environment of rising -- or persistent near-0% -- interest rates. And you could add other assets that wouldn't move in sync with stocks or bonds.
Here are some strategies that might help you hedge against whatever scenario you most fear.
If stocks suddenly start sliding
Because equity indexes already have gained about 15% this year, a pullback wouldn't be surprising, says Lewis Altfest, principal adviser at Altfest Personal Wealth Management in New York.
You may suffer smaller losses, he says, if you cut back on small- and mid-cap stocks and shift more to blue-chips that consistently pay dividends and have global reach. These types of stocks tend to be steadier bets during uncertain times.
Consider investing in an ETF such as SPDR S&P Dividend (SDY) which owns shares of companies that have a record of steadily increasing their dividends, or Guggenheim Russell Top 50 Mega Cap (XLG) which focuses on 50 of the largest-cap U.S. stocks. You also might try investing in an ETF that favors less-volatile stocks.
If a natural disaster or war sparks market panic
Keeping at least some of your portfolio in fixed-income securities offers one of the best long-term counterbalances to equity volatility, says Ben Johnson, global director of passive-funds research at Morningstar Inc. High-quality bonds such as Treasurys typically rally in turbulent times -- although at their current levels, they likely have less room for appreciation than in the past.
Investors also should consider an allocation to an absolute-return strategy, which aims to make money regardless of the direction of stock and bond markets, says Jeffrey Knight, head of global asset allocation at Columbia Management.
"They can add another dimension of diversification," he says. The downside is that these funds, which include long-short funds that bet that some securities will rise and others fall, often charge relatively high expenses of 2% to 3% a year of assets.
The Gateway (GATEX) fund writes covered calls, which are options that give their owner the right to buy a stock at a certain price by a specified date. The fund gets additional income from selling the options, and can pay that income out to fund holders. Gateway uses some of its income from selling covered calls to buy downside equity protection. It returned an annualized 6.5% over the past three years, and the net expense ratio is 0.94%.
Another relatively low-cost option is Glenmede Total Market (GTTMX), a long-short fund with a 1.25% expense ratio and a 4.5% five-year average annual return.
If U.S. interest rates jump when the Fed reduces stimulus
Bond yields move in the opposite direction of their prices and have stayed low because of the Federal Reserve's massive purchases of bonds in an attempt to keep borrowing costs down and stimulate economic activity. But yields could rebound once the Fed pulls away from that policy, and that would erode the principal value of any bonds you own.
Bond funds, with no final maturity, are particularly vulnerable. One that owns intermediate maturities could lose 4% to 5% of principal value if rates broadly rose one percentage point.
Consider switching to a fund with a tactical focus that can shift holdings to reduce risk, says Jerry Villella, who oversees client portfolios at J.P. Morgan Private Bank in Dallas. Among flexible funds are Pimco Total Return (PTTAX), which also comes in an ETF version (BOND) and Pimco Unconstrained Bond (PUBAX).
Shorter-maturity bonds will lose less value in the event of a rise in interest rates. Philip Wagner, portfolio manager at the Bryn Mawr Trust unit of Bryn Mawr Bank Corp., near Philadelphia, says investors might put 60% of their bond bucket into Vanguard Short-Term Investment-Grade (VFSTX) and 40% into Vanguard Intermediate-Term Investment-Grade (VFICX). The result would be a blended rate sensitivity about half that of the typical core bond fund.
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Too many if's !
I was waiting to see the statement: "IF Aliens visited us now......
"If a natural disaster or war sparks panic"? Like a Cosmo Mag question? "Be undaunted" says some tweeting twit on Wall Street, "while everyone else is trying to survive the new Holocaust you can invest at rock bottom and make a killing..."
Really now, aren't we DONE with STUPID yet? Bernanke IS the stock market. No business platform is actually capable of being an enterprise now. They are all administratively-operated gambling ventures and wholly counter-American. It was bad enough that Gen X & Y floated through the defining years of life, but now they just scoop out profits funded by centuries ahead of gross indebtedness. It's not even madness... it's blatant corruption. Obviously- government no longer runs the nation, bankers do. Ask yourself if you're okay with that. Be sure to contemplate what comes around after what goes around is exhausted or compromised by dilution.
Isn`t the far right sick of repeating that lie"the market is only up because of the 85 billion
the Fed is pumping into the market"The market goes up because of PROFITS.Profits
are at record levels.Wages are low for companies because of the outsourced jobs to
China and the like.
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