Personal Business: SMART MONEY
MANAGING YOUR PORTFOLIO--FOR ORDERLY GROWTH, AND NO ULCERS
No one would be surprised if your blood pressure weren't swinging wildly as your mutual funds bounce around in the current turbulent stock market. Fortunately you can do something about that. Maybe it's time to look at an investment strategy that aims at stability over big capital gains.
One way to achieve this goal is to assemble a portfolio of money market, high-income bond, and balanced mutual funds. While its performance won't knock your socks off, the portfolio--we'll call it Slow and Steady--still offers reasonable current income and retains some exposure to the equity market for the day when stocks return to favor. The four funds that make up the portfolio have also turned in steady returns, with low volatility, over the past three years (table).
Let's start by putting 20% of your Slow and Steady portfolio into the money market fund. It will act as the anchor for the income portion of your asset allocation. Since money funds' net asset values don't fluctuate, the principal value of this part of the portfolio will remain intact. Even if the market falls, this fund will hold its value and provide solid income. My favorite is Vanguard Money Market Reserves Prime Fund because it is waiving expenses and is extremely well-managed. The fund has a current yield of 5.28%, one of the highest available.
For even greater income and a chance at appreciation if yields continue to fall, invest the next 20% of the portfolio in a high-income bond fund. I like Vanguard Fixed Income High Yield Corporate. It currently has a 12-month yield of 8.74%, and manager Earl McEvoy is steering clear of lower-quality junk debt, arguing that their higher yields don't justify their credit risk. In the last three years, the fund has averaged a 9.25% total return. Its standard deviation, a measure of the volatility of the fund's returns, is a comfortably low 4.4% and is a quarter of that of the Standard & Poor's 500-stock index.SPLIT DECISION. One of my favorite all-weather fund groups is balanced funds, and that's where the remaining 60% of your assets should go. Balanced funds split their holdings between stocks--typically 60% of total assets--and bonds--the remaining 40%. The bonds add stability, while the equities provide total return. In down markets, these funds hold up very well, while in rising markets, you still get equity exposure. Having 60% of your portfolio in these funds will orient you toward conservative growth.
My choices for balanced funds are Vanguard/Wellesley Income and Invesco Balanced. Vanguard/Wellesley focuses on high-quality bonds and big-cap equities paying high dividends and has a yield of more than 5%. Vanguard/Wellesley has also scored a tidy average total annual return of 13.72% in the last three years. Its standard deviation is 7.6%.
Invesco Balanced, meanwhile, has had a total average annual return in the last three years of 15.3%, with a standard deviation of 10.9%. Managers Charles Mayer and Jerry Paul currently favor defensive consumer stocks, including retailers. They also are partial to electric utility debt. But they say they're not anxious to dive into 30-year U.S. Treasuries unless their yield climbs back to 6.25%, roughly a percentage point above where they're trading at now.
The combination of a money fund, high income bond fund, and two balanced funds produces a current average portfolio yield of just over 5%. This is about equal to the yield on the average taxable money market fund but about 3.5 times the yield on the S&P 500. The combination would have achieved an annualized total return of 11.6% over the last three years, with a standard deviation of about 6.4%. The way the stock market is right now, you shouldn't count on returns of that order continuing. But this portfolio gives you plenty of cushion against further Wall Street volatility.By Chip NortonReturn to top