The second-longest bull market in history has to end eventually, right? And even if there are few signs that its demise is imminent, it’s wise to get ready—to prepare your portfolio for rougher times. Stock prices overall are at lofty heights after having more than tripled over the past 105 months…interest rates are headed up, which tends to reduce the attractiveness of stocks…and you are sitting on stock gains vulnerable to sharp pullbacks. To help you tilt your investment approach to a more defensive stance without missing out on possible further gains, Bottom Line Personal asked six experts what moves our readers could make now. Their strategies range from adding cheap foreign stocks to diversifying into asset classes that don’t move in sync with stocks or bonds…
Stock and Stock-Fund Moves
Trim overvalued stocks, and reinvest in bargain-priced ones. Large, fast-growing companies with spectacular stock price gains this year—such as Boeing (up 68%), PayPal (84%), Netflix (59%), MasterCard (45%) and Caterpillar (50%)—are likely to suffer the steepest losses if their revenue and earnings don’t meet investor expectations. Taking some profits and investing in cheaper, dividend-paying stocks allows you to dial back risk without turning your back on the market.
Why it’s a shrewd strategy: If the economy continues to strengthen, various undervalued companies are likely to improve their earnings, surprise investors and see their share prices shoot up. But if there’s a correction or economic slowdown, there’s a built-in margin of safety, thanks to their dividends and the fact that investor disappointment already is reflected in the low share prices.
My favorite undervalued companies now…
Ford Motor Co. (F). The auto company’s stock had negative returns in 2015 and 2016 and was up just 6.5% this year as of October 31 due to weaker-than-expected sales and a lack of progress in developing a long-range, next-generation electric car. But a new CEO has unveiled plans to cut $14 billion in annual costs by streamlining Ford’s bureaucracy and to introduce 13 new hybrid and electric vehicle models over the next five years. Recent yield: 4.9%. Recent share price: $12.10.
Enterprise Products Partners (EPD). Energy is this year’s worst-performing sector in the S&P 500 because of a continuing global oil glut. But Enterprise, which transports oil and natural gas over approximately 50,000 miles of pipeline, benefits from long-term contracts no matter what the current price of oil. As the dominant player in transporting liquid natural gas (LNG) to the Gulf coast, the company also benefits as the US becomes a major LNG exporter to the rest of the world. Recent yield: 6.8% Recent share price: $24.80.
Charles Sizemore, CFA, is chief investment officer of Sizemore Capital Management, an investment advisory firm in Dallas. He is coauthor of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy. CharlesSizemore.com
Choose stocks of large foreign companies. Despite impressive gains this year, many foreign markets still are cheap, having yet to reach their 2007 prebear-market highs. In addition, the world’s major foreign economies, including Canada, China and eurozone nations, all appear to be on solid growth paths.
Examples of attractive foreign stocks now…
China Mobile Ltd. (CHL). The telecom giant dwarfs its Chinese competitors with nearly 900 million customers and should see strong growth as it rolls out its new generation 4G service. Recent yield: 3.6%. Recent share price: $50.32.
Deutsche Lufthansa AG (DLAKY). It has reinforced its position as Germany’s largest airline by buying up parts of bankrupt competitor Air Berlin. Consolidation in Europe’s heavily fractured airline sector should help Lufthansa boost profits. Recent yield: 1.8%. Recent share price: $32.16.
Magna International (MGA). The Canadian company is one of the world’s leading auto-parts manufacturers. It is well-positioned, no matter which automakers come to dominate the market for semiautonomous and self-driving cars. Recent yield: 2%. Recent share price: $54.46.
Doug Ramsey is chief investment officer of The Leuthold Group, based in Minneapolis, which has more than $1.5 billion in assets under management. He is co-portfolio manager of Leuthold Core Investment Fund and Leuthold Global Fund. LeutholdFunds.com
Invest in a mutual fund that specializes in undervalued stocks of large companies. If you don’t have the time, expertise or inclination to buy stocks, funds can provide instant diversification.
My favorite fund specializing in undervalued large-cap stocks now…
Vanguard Equity-Income Fund (VEIPX) has kept up with major US indexes in market rallies and has outperformed them in volatile times. It holds shares in nearly 200 US and foreign companies with healthy balance sheets, underrecognized growth prospects, strong cash flows and dividends that can increase over time. The fund has outperformed the S&P 500 over the past decade and has done so with less volatility. Recent yield: 2.7%. 10-year performance: 7.8%.
Mark Salzinger is chief investment officer of Salzinger Sheaff Brock LLC, a money-management firm in Indianapolis, and publisher of The No-Load Fund Investor newsletter. NoLoadFundInvestor.com
Limit your potential losses. You may think that stocks you own will continue to rise even if they have already appreciated greatly. The danger is that if these stocks do start to drop and you then “freeze” in hopes that they will rebound—which is exactly what many investors tend to do—you will end up riding your stocks all the way down and decimating your gains.
What to do: Put “stop loss” orders on your high-flying stocks. A stop loss is simply a standing order that you place with your broker to automatically trigger the sales of shares of a stock you own as soon as it drops below a predetermined price.
Stop losses take the emotion out of selling and help you preserve some of the gains you’ve made. How much of your holdings you want to sell and at what price depends on your risk tolerance and the state of the market.
Terri Spath CFA, CFP, is chief investment officer at Sierra Investment Management, a financial-advisory firm that manages $2.5 billion in assets, Santa Monica, California. SierraInvestment.com
Bond and Bond-Fund Moves
Make sure the bonds you own provide a cushion against stock volatility. Interest rates have been so low for so long that many investors have turned to bonds of companies with weak credit ratings to earn higher yields. Historically, when the stock market gets slammed, such “junk bonds” have not provided much protection, suffering losses almost as steep as those of stocks.
Example: From 2007 to 2009, when the Standard & Poor’s 500 stock index lost 50%, the Bloomberg Barclays US Corporate High Yield Bond Index dropped 41%. Meanwhile, the “investment-grade” bonds in the Bloomberg Barclays US 1-5 Year Corporate Bond Index fell just 0.5%. In today’s market, you want bonds to be the boring, most stable part of your portfolio.
What to do: Make sure your bond and bond-fund holdings consist mostly of corporate and government bonds with credit ratings of A or higher and maturities of five years or less. Eliminate any bonds with credit-quality ratings lower than BBB and any bond funds with average credit ratings below that level.
Peter Mallouk, JD, CFP, is president and chief investment officer of Creative Planning, a wealth-management company in Leawood, Kansas. He is ranked number one in Barron’s Top 100 Independent Advisors list for 2017. ThinkingBeyond.com
A Commodities Move
Add investments that don’t move in unison with either stocks or bonds. With low unemployment and wages beginning to move higher, I expect inflation to start rising significantly for the first time in years. As a result, the Federal Reserve will continue to hike interest rates, perhaps faster than it expects to now. Under this likely scenario, both stocks and bonds could be hurt.
However, commodities, which have been relatively cheap for years, tend to do very well in inflationary environments.
What to do: Invest in an exchange-traded fund (ETF) that focuses on commodities. Putting 10% of your investment portfolio into commodities, for example, could shore up your overall returns when other parts of your portfolio sag.
My favorite commodities ETF now…
iShares Commodities Select Strategy ETF (COMT) can invest in any of 24 types of commodities, either directly or through companies that produce them. These include agricultural commodities, base metals, timber and energy, as well as other types of commodities. Recent share price: $35.90.
Bob Carlson is editor of Retirement Watch, a monthly newsletter. He is managing member of Carlson Wealth Advisors and chairman of the board of trustees of the Fairfax County (Virginia) Employees’ Retirement System. RetirementWatch.com