Many jittery investors have been telling top financial adviser Louis Stanasolovich that they are more confused than at any time since the 2008–2009 recession. They are worried about the dysfunctional Congress…an economy stuck in low gear…a stock market that looks to them to be wildly overvalued…and bonds with the lowest yields in decades whose value could plunge when interest rates start to rise. They want to ratchet down their risk—even if that means forgoing potentially bigger returns in some years. Stanasolovich has designed a low-volatility portfolio of funds meant to preserve assets even in bad markets and register modest but steady gains even in tough times.
Volatility will be a major problem in the coming years, with not much reward for investors who take big risks. My team expects stocks to return an average of about 5% annually over the next decade and US Treasury bonds just 2%, and both could suffer double-digit losses in any given year. There are no guarantees, but for especially cautious investors, a safer portfolio could seek to average between 3% and 4% annually, with little chance of more than a mid-single-digit percentage loss in any year. The key is putting together a diversified mix of between 12 and 20 mutual and exchange-traded funds (ETFs). I look for fund managers who don’t just analyze individual stocks and bonds. They also make big-picture decisions about where interest rates are headed and what mix of asset classes will achieve the best total returns under current conditions—and they have great flexibility to adjust their portfolios.
My portfolio for 2013 includes…
70% in fixed-income funds. This ultraconservative portfolio is heavily invested in fixed-income funds because we believe that they will be relatively stable this year and will help offset potential stock market declines. The fund managers have great flexibility to shift among bonds with different ranges of maturities and credit ratings.
Important: If economic growth strengthens considerably and we do get fast-rising interest rates and inflation—and that could happen in 2014 or beyond, but we don’t expect it this year—these funds are agile enough to minimize losses and even produce gains. However, in such an environment, we would also decrease overall bond exposure markedly and increase investments that do better in such times, such as stocks and gold.
27% in alternative-stock funds. Stocks could be especially volatile this year because of so much uncertainty in Congress about how to deal with our many economic problems. Many of the stock funds in this portfolio will capture a large portion of the upside if stocks soar. And if stocks plunge, these funds can keep risk at bay by switching into alternative investments, such as foreign currencies and commodities, as well as shorting (betting against) stocks and hedging current holdings with futures contracts that allow them to buy or sell investments at a specified price.
3% in gold-bullion funds. Although gold’s prices can be volatile, it is an excellent diversifier to help balance the overall portfolio, and it has little correlation to either stock or bond returns.
Even if you already have an extensive portfolio, adding or transitioning to some of the funds below can reduce your concerns about big losses.
DoubleLine Total Return Bond Fund (DLTNX). Jeffrey Gundlach, who manages this fund launched in 2010, has become a superstar investor over the years by mastering a lesser-known part of the bond world—high-quality government agency mortgage-backed securities. Fully backed by the US government, they can exhibit low volatility in good times and bad. Recent yield: 5.5%. www.DoubleLineFunds.com
Eaton Vance Floating Rate Fund (EABLX) invests in loans made by banks to companies with lower-quality credit ratings. Since default rates among these firms are quite low right now, it offers an attractive yield without much risk. And yields on bank loans are not fixed like those on corporate bonds—they adjust every 30 to 90 days. Recent yield: 4.2%. www.EatonVance.com
Osterweis Strategic Income Fund (OSTIX). This multisector fund buys a wide range of lower-quality corporate bonds for their higher yields but tempers volatility by keeping the average maturity at three and a half years. Recent yield: 5.3%. www.Osterweis.com
Pimco Total Return Fund (PTRRX). Run by famed fixed-income manager Bill Gross, this intermediate-term bond fund is a core holding for low-volatility investors. Recent yield: 3.3%. www.Pimco.com
RS Low Duration Bond Fund (RSDYX). This short-term bond fund looks for undervalued government and corporate bonds with an average maturity of a little more than two years. Recent yield: 2%. www.RSInvestments.com
Templeton Global Bond Fund (FGBRX) invests in government bonds and currencies in fast-growing emerging-market countries in Asia and Latin America. Recent yield: 5.3%. www.FranklinTempleton.com
Caldwell & Orkin Market Opportunity Fund (COAGX) typically keeps a portion of its portfolio in stocks that it buys “long,” betting that their prices will rise, but unlike most stock funds, it also offers substantial protection in declines by “shorting” stocks, betting that their prices will fall. Performance: 5.2%.* www.CaldwellOrkin.com
Ironclad Managed Risk Fund (IRONX), launched in 2010, uses a strategy involving stock options contracts that sharply reduces losses in market declines and limits gains in rising markets. Two-year performance: 7.2%, compared with 9.2% for the S&P 500. www.IroncladFunds.com
Invesco Balanced-Risk Allocation Fund (ABRYX), launched in 2009, is a global fund that divides its portfolio among bonds, commodities and stocks. Performance: 12.3%. www.Invesco.com
Leuthold Asset Allocation Fund (LAALX) is a global fund that uses computer models to analyze economic factors and trends, then invests in a wide range of stocks and bonds. Performance: 5.6%. www.LeutholdFunds.com
Pimco All Asset All Authority Fund (PAUDX). Highly respected fund manager Robert Arnott uses computers to figure out what combination of asset classes will produce optimal returns with low volatility. The fund typically invests in about 40 individual Pimco mutual funds. Performance: 9.1%. www.Pimco.com
SPDR Gold Shares ETF (GLD) is an ETF that offers the convenience of owning gold without taking physical possession. Performance: 11.80%. www.SPDRGoldShares.com
For even greater diversification, see additional fund favorites from Louis P. Stanasolovich, CFP, for this type of portfolio at www.BottomLinePublications.com/saferportfolio.
*Unless otherwise noted, all performance figures are based on three-year annualized returns through February 28, 2013.
