Sunday, 14 December 2008

So Many Choices to Rebalance a Portfolio, Made Cheaper by Falling Markets

OCTOBER 9, 2008, 7:52 A.M. ET
Plunge Gives Investors Chance to Diversify
So Many Choices to Rebalance a Portfolio, Made Cheaper by Falling Markets

A lot of people came into this crash totally unprepared. They're holding all their money in a few stocks, or in a few mutual funds that are too similar to one another. They're getting crushed.
No wonder so many are panicking and are selling out.
But if you're in this situation, here's a better idea: Don't bail, but rebalance.
Sell your concentrated or random portfolio, and put your money into a broader mix of investments. The most stable portfolios are spread across multiple assets, asset classes, and investment styles. The good news is that today, because there are so many different investment funds on the market, anyone can do it.
Here's an illustration of what that might look like with, say, $100,000.
Let's say you wanted to put maybe 30%, or $30,000, in bonds to provide some welcome stability. They tend to be less volatile than stocks.
Right now regular Treasurys, the bonds issued by Uncle Sam, are pretty expensive. Everyone's been buying them in panic. The 30-year Treasury as a result pays a paltry 4% interest.
You might decide there are better opportunities elsewhere. Municipals, for example, are actually yielding more than Treasurys and they're tax free. So you could put $10,000 into a municipal-bond fund like Eaton Vance National Municipals, which is yielding well over 5%. You could put another $10,000 into inflation-protected Treasurys, also known as TIPS, which are still reasonably priced. Vanguard's Inflation-Protected Securities is one of the best-known funds. And you might round out your bond holdings by putting $10,000 into a flexible bond fund, like Loomis Sayles Bond, that can pick up opportunities anywhere. Veteran manager Dan Fuss sees some of the best bargains in investment-grade corporate bonds.
Let's then say you still want the bulk of your investments exposed to the world's stock markets. That is, after all, where most money is traditionally made over the long term.
But you might be looking for smart managers who have flexibility to hold cash, protect against market falls, ignore landmines, and grab opportunities where they see them.
You can pick several managers and invest $10,000 with each. Two funds I happen to own are Quaker Strategic Growth (QUAGX) and Fairholme. Both have good long-term records. There are plenty of other good ones out there. Fresh investors might prefer manager Manu Daftary's newer fund, Quaker Global Total Return, which is smaller and has even more flexibility than his Quaker Strategic Growth.
Another good holding might be Diamond-Hill Long-Short, a fund that operates a bit like a hedge fund and seeks to produce good returns in any market.
A fourth might be Gateway, which has a long record of producing good returns with pretty low volatility: For decades, this fund has held equities and sold call options against its holdings to generate income.
You could add further strings to your bow by investing $10,000 each in, say, Japanese equities, emerging markets, and maybe commodities. Examples for the first two might be T. Rowe Price Japan and Vanguard's Emerging Markets Stock Index fund.
On commodities, you've got a pretty broad range of options. You can invest in assets themselves, or the companies that produce them. An example of the former is the streetTracks Gold Trust, an exchange-traded fund that tracks the gold price.
You might reason that gold looked a lot more interesting eight years ago, when it was $250 an ounce and no one was talking about it, than it does now, when it's nearly $900 an ounce and no one will stop talking about it.
As a novice, you might instead decide to place your tenth chip on managed timber, an asset with an excellent long-term track record of producing solid returns. Fund legend Jeremy Grantham, along with the managers of Harvard University's endowment, have been fans recently. One possible route would be to buy shares in Plum Creek, the blue-chip stock in the sector. It's a real-estate investment trust that owns timberland. A caveat: This, too, has risen quite a distance. It's nearly trebled in ten years.
Past performance is no guide to the future, of course. Nonetheless when I checked out how this portfolio would have fared during the turmoil of this decade, it stacked up pretty well.
I could only trace it back to August 2000, when several of these funds were launched. (and I could only include Diamond Hill from its launch in December).
But from August 31, 2000 through this week, with dividends reinvested, this portfolio would have gained about 61%. Wall Street overall, by contrast, is down about 21% over that period.
And this portfolio would have let you sleep a lot easier, too. Through the crash of 2000-2003 it fell just 5%, while the wider market nearly halved.
Almost nothing has been spared in the incredible worldwide crash of the last year. But this portfolio has only fallen 24% from the peak, while Wall Street overall has fallen about 35%.
Like I said, this is only an exercise and an illustration. Anyone can put together a pretty broadly diversified portfolio these days. There are an infinite number of varieties.
You could, for example, replace one of the equity funds above with one specializing in international small cap stocks, like Oakmark International Small Cap (OAKEX). They've been absolutely crushed in the last year and there are plenty of bargains to be had.
Or you could pick some other active fund managers, like Ken Heebner at CGM Focus, or Marty Whitman at Third Avenue Value, or even Warren Buffett at Berkshire Hathaway.
Or you could replace a couple of the investments with closed-end funds trading at big discounts to their net assets. The BlackRock S&P Quality Rankings Global Equity Managed Trust, which invests in top quality blue-chip stocks, is selling for 19% below net asset value. Clough Global Opportunities, a well-managed global investment fund mentioned here before, is an incredible 29% below.
The positive side to this crash is that lots of these investment options are now going cheap. That makes it easier to rebalance your portfolio into something more broadly based, and, one hopes, stable.
Write to Brett Arends at

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