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5 Portfolio Moves to Make Now

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After years of extremely low ­inflation, interest rates and stock market volatility, investors have begun to face greater challenges on all three fronts. The market correction of more than 10% early this year, partly in response to fears of higher inflation and interest rates, came as a shock to many—but it shouldn’t have. There are real reasons to wonder how much longer the nine-year-old bull market can last. And drooping bond prices—another result of rising interest rates—have added to investor queasiness.

To help our readers navigate this newly turbulent and tricky environment, Bottom Line Personal asked five leading money experts what tweaks would be wise for investors to make in their portfolios now…

Volatility

In February, a dozen trading days saw the Standard & Poor’s 500 stock index lose or gain more than 1%—the most market volatility in about two years. Greater volatility could make it more difficult to cash out investments at profitable points if you need to. If market swings are making you jittery and tempting you to flee, there are ways to reduce the volatility of your portfolio.

What to do now…

Shift to “low-beta” stocks. Beta is a common measurement of how volatile a stock is relative to a broad market index. The S&P 500 has a beta of 1, and the beta for every stock is relative to that. A stock whose share price historically tends to swing up and down by 10% more than the index has a beta of 1.1…a stock that swings 10% less has a beta of 0.9. Low-beta stocks often hold up relatively well in turbulent markets because the companies tend to have steady (even if slow) earnings growth and reliable dividends.

Attractive stocks with low betas: ­PepsiCo (PEP), three-year average beta 0.59…Johnson & Johnson (JNJ), 0.53…Procter & Gamble (PG), 0.29…and Church & Dwight (CHD), whose brands include Arm & Hammer, 0.22.

Hugh Johnson is chairman of Hugh Johnson Advisors, Albany, New York, which serves as a manager and investment consultant for more than $2 billion in assets. HJAdvisors.com

Get adequate exposure to stock markets of developed foreign countries. While US investors have enjoyed nine years of economic expansion and very strong market returns, the European recovery began only about four years ago, and it started to accelerate last year. Europe offers cheaper stock valuations including a “forward” price-to-earnings ratio (P/E, based on predicted earnings per share over the next 12 months) of 14 compared with 17.5 for the S&P 500. Also, the inflation rate is just 1.3% year over year, and the European Central Bank has pledged to keep interest rates near zero.

­Recommended: WisdomTree ­Europe Hedged Equity Fund (HEDJ) provides exposure to about 130 stocks of companies with strong cash flow and dividend yields in countries that use the euro. The fund hedges its currency exposure, which minimizes the effect of currency swings on share price. Recent yield: 2.3%. Performance: 9.5%.*

Mark Germain, CFP, is founder and CEO of Beacon Wealth Management, a financial-advisory firm with more than $250 million in assets under management, Hackensack, New Jersey. BWMllc.com

Inflation

Thanks to a stronger economy along with federal tax cuts, greater government spending and very low unemployment, economists expect an uptick in inflation, which could quicken the pace of interest rate hikes by the Federal Reserve.

What to do now…

Invest in inflation-protected bonds. Many fixed-income investors welcome the safety of owning US Treasuries, but they worry that the purchasing power of ­income from Treasuries will be eroded by fast-rising inflation.

Treasury Inflation-Protected Securities (TIPS) have a built-in mechanism that increases the face value of the bonds in the fund’s portfolio as the inflation rate rises. As a result, the payouts rise and the bonds are worth more at maturity.

Best way to invest in TIPS: Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIPX). Over the past three years, the Vanguard fund had annualized returns of 0.75%, compared with 0.42% for an index of short-term, noninflation-protected Treasuries.

Russel Kinnel is director of manager research at Morningstar Inc., Chicago, which tracks 570,000 investment offerings. Morningstar.com

Interest Rates

Investors have bet successfully for years that interest rates would remain low. But the Federal Reserve is expected to start acting more aggressively to prevent the economy from overheating, which could mean much more rapid interest rate increases to ward off higher inflation.

Higher interest rates are unfavorable for stocks because they make various low-risk alternatives such as money-market funds more attractive.

Also, higher interest rates raise the cost of borrowing, which could make companies less profitable, burden households with higher debt levels, slow economic growth and even lead to a recession, the most common reason that bull markets die.

What to do now…

Shorten your bond durations to three years or less. I have been advising my clients to eliminate from their portfolios long-term bonds, which face heavy losses as interest rates rise. I have been focusing on bond durations—a measure of sensitivity to interest rate increases—of three years or less. The shorter a bond’s duration, the less likely it is that the bond will lose value as a result of increases in interest rates.

Example of a low-duration bond fund: Vanguard Short-Term Bond ETF (BSV) is a low-cost exchange-traded fund ­(annual expense ratio of just 0.07%) that offers strong downside protection with high-quality government and corporate bonds and a recent duration of just 2.7 years. ­Recent yield: 2.5%. 10-year annualized performance: 2%.

Scott B. Tiras, CPA, CFP, is president of Tiras Wealth Management, a financial-advisory firm based in Houston that has a total of $2.2 billion in assets. TirasWealth.com

Pick up bargains in real estate investment trusts (REITs). REITs own ­income-producing commercial real estate, and they pay 90% of their earnings as dividends. They have been one of the worst-­performing sectors this year, down by 10% through March 1, because of fears that higher interest rates will increase borrowing costs, leaving less money available for any dividend ­payouts.

But I expect REITs to rebound because a strong economy allows them to charge tenants higher rents. During the 2004–2006 period, when the Federal Reserve hiked interest rates 17 times, ­REITs posted a cumulative total return of 77.9% compared with 32.5% for stocks.

Best way to play REITs now: Vanguard Real Estate ETF (VNQ) has more than 180 holdings. Recent yield: 4.8%. 10-year annualized performance: 6.8%.

Wes Moss, CFP, is chief investment strategist at Capital Investment Advisors, based in Atlanta, which manages more than $1 billion in client assets. He is author of You Can Retire Sooner Than You Think: The 5 Money Secrets of the Happiest RetireesWesMoss.com

*All performance figures are five-year annualized returns through March 1, 2018, unless otherwise indicated.

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Date: April 15, 2018
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