A weatherproof portfolio
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July 3, 2001: 7:47 a.m. ET
There are ways to protect your investments from market volatility
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Market angst is leaving a lot of people feeling trapped into a lifetime of penny pinching, budget vacations and used cars. It's as if every profit warning, every downward tick of the Nasdaq, kills another retirement dream.
But there are ways to toughen up your portfolio so you won't be handcuffed by the ups and downs of Wall Street. Financial freedom in a contrary market isn't as illusory as you think.
"It's not the stocks you pick, it's the structure of your portfolio that counts," said Hugh Johnson, chief investment officer at First Albany Corp.
Of course, there's no foolproof way to make money in every market or we'd all be rich and the Dow would be trading around 100,000 instead of 10,000.
You need to start with a diversified portfolio, with your money spread between many types of investments. Part of your holdings will always look sick, but in the long run you'll weather volatility.
"Asset allocation is the name of the game," said Russell Hall, a certified financial planner from Witchita, Kan.
That means your lineup should have large-, mid- and small-cap stocks, including growth and value, as well as international stocks and some bonds. Your allocation will depend on your age, risk tolerance and long-term goals. (Click here for some recommended portfolios for different age groups).
Hall's suggested portfolio includes a heavier weighting in value stocks, 10 percent in high-yield bonds and 10 percent in aggressive growth, including technology and small caps. He recommends the lineup for someone in their 40s.
"Having a good allocation only protects you if you're willing to rebalance periodically so you're selling high and buying low," Hall said.
From there, consider investments that have delivered decent returns since the market soured, such as real estate and equity-income funds.
Steven Buller, manager of Fidelity Real Estate Investment Fund, said real estate is a good bet for several reasons. The stocks pay dividends to shareholders and have lower price-earnings ratios than other parts of the market. The stocks are also less volatile, and average annual returns are about 10 percent to 15 percent.
"In late '97 and '98, everyone was chasing technology and the Internet bubble," Buller said. "God forbid you'd want to own a real estate stock with a dividend built in. Why make 10 percent in a year when you could make 10 percent in 10 minutes?"
The Fidelity fund, with about $1.03 billion in assets, is up 7.09 percent year-to-date as of June 27, beating the S&P 500 by nearly 15 percent, according to Chicago fund-tracker Morningstar.
The fund earned 31.4 percent in 2000, putting it about 40.5 percent ahead of the S&P 500, Morningstar said.
Real estate funds invest in stocks as well as real estate investment trusts, or REITs. A REIT is a corporation or trust that uses pooled capital from many investors to buy income property or mortgage loans.
"Look out your window – real estate is not going away," Buller said. "When the whole Internet thing came along, people said the shopping mall would go away, which is ludicrous."
While the softening economy has had an impact on real estate, the sector hasn't felt as much of a pinch, Buller said.
"A lot of the property has a lease element...so it's locked-in cash flow," he said. Average leases for office space are five to seven years, for example.
Within the sector, Buller is upbeat about industrial and office property. He also likes a part of the market known as "commodity apartments," which are rental properties for people who find it difficult to upgrade to single-family homes.
"This year, earnings are OK – they're not bad like what's happening in corporate America," Buller said.
Another option for the risk-averse investor are equity-income funds, which invest in stocks that have higher than average dividends, said Jack Brod, a principal at fund giant Vanguard Group.
A lot of the stocks in equity-income funds are from four sectors – utilities, financial services, oil and health care, including pharmaceuticals, Brod said.
"They have much less volatility than the broader market," Brod said. "They don't fully participate in strong bull markets, but they outperform in flat or declining markets. They add a terrific element of diversification."
Vanguard Equity Income Fund, with $2.69 billion in assets, is down 2 percent year to date as of June 27, but it's still beating the S&P 500 by nearly 6 percent, Morningstar said. The fund in 2000 earned 13.6 percent, putting it 22 percent in front of the blue chip index.
Top holdings include Exxon Mobil (XON: Research, Estimates), Verizon Communications (VZ: up $0.87 to $54.37, Research, Estimates), and BP (BP: down $0.85 to $49.00, Research, Estimates), which trades as an American Depositary Receipt.
Don't forget basic stock analysis
Still, Johnson, of First Albany, said investors should not just depend on the "buy and hold" philosophy. It's just too easy for a stock to fall apart.
"The fundamental premise in this business is you cannot be stuck in this business," Johnson said. "You can buy stocks for the long haul, but if the market breaks down, you're going to suffer. You're going to pay for it."
Johnson uses daily, weekly and monthly stock prices and compares them to moving averages to determine the health of a company.
"I'm not going to ignore the deterioration in a stock," Johnson said. Last year, he was selling companies like Cisco Systems, for example. This year, he's finding breakdowns in EMC Corp. (EMC: up $1.35 to $30.60, Research, Estimates), Bristol-Myers Squibb (BMY: up $1.17 to $53.47, Research, Estimates), Texas Instruments (TXN: up $0.93 to $32.83, Research, Estimates), and Sun Microsystems (SUNW: up $0.05 to $15.77, Research, Estimates).
That said, Johnson is upbeat about industrials like GE (GE: up $1.20 to $50.20, Research, Estimates) and Tyco (TYCO: Research, Estimates); consumer cyclicals like Target and McGraw-Hill (MHP: up $0.20 to $66.35, Research, Estimates), Home Depot (HD: up $0.46 to $47.70, Research, Estimates) and Harley-Davidson (HDI: up $0.18 to $47.26, Research, Estimates); and financial stocks.
(Click here for a look at which sectors are likely to be hot in the second half of 2001.)
Hall, the CFP from Kansas, likes to go with the basics, like food and health companies, oil and natural gas stocks and the life insurance business. He likes Johnson & Johnson (JNJ: up $1.23 to $51.19, Research, Estimates), Tyson Chicken (TSN: up $0.09 to $9.30, Research, Estimates), and Archer-Daniels-Midland (ADM: up $0.47 to $13.52, Research, Estimates).
Hall also likes companies in the funeral business, such as Service Corp. International (SRV: up $0.20 to $6.56, Research, Estimates) and Carriage Services (CSV: up $0.08 to $5.77, Research, Estimates), which sell caskets, and Neptune Society (NTUN: Research, Estimates), which specializes in cremation services.
"Anything that caters to the aging population will weather the downturn really well," Hall said. "I'm not against high tech. I just think your high tech investments will be more volatile. They aren't safe harbors."
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