It’s back to square one: With accounting firms being indicted, new-idea companies in bankruptcy and investor confidence iffy, the concept of “all-weather” investments is back in vogue.
That means investing in dependable stocks and mutual funds least likely to get trashed by the vicissitudes of life, the economy and the market–even if it does look as if the dark clouds may be lifting. That’s the long-term way most folks invested until they became infatuated with high-flying technology a few years back.
A prime example of an all-weather vehicle is the $6.54 billion Vanguard Wellseley Income (VWINX), a “balanced” fund that usually keeps 60 percent of its assets in investment-grade bonds and the rest in stocks. It has a five-year annualized return of 9.85 percent, is “no load” (no sales charge) and requires a $3,000 minimum initial investment.
Wellseley’s largest holdings include ExxonMobil, GNMA, SBC Communications, BellSouth, Weyerhaueser, FNMA debentures, XL Capital Class A, Verizon Communications and Caterpillar.
You say that doesn’t make your heart pump wildly with anticipation? That’s the point.
“Take a deep breath and remember why you’re investing,” advised John Buckingham, co-editor of “The Prudent Speculator” newsletter. “An all-weather stock won’t get beat up in a down market, but may require that you give up some upside price potential in exchange for safety.”
The Prudent Speculator has averaged a 20 percent annual return on its model portfolio for 25 years with a portfolio “that might cause a lot of people to yawn,” he said. Meanwhile, the conservative Al Frank Fund (VALUX), which Buckingham co-manages, boasts a three-year annualized return of 35.86 percent.
Current events, sometimes even tragic ones, can provide even a long-term stock selection with sudden price appreciation. Buckingham bought InVision Technologies (INVN) for $1.43 a share in January 2001 for the long haul because he thought its advanced explosive detection system used in aviation security merited his patience. Following the events of Sept. 11, that stock jumped to $49 a share. (It closed Monday at $46.07.)
“We all have to eat, pay our light and gas bills, pay for our insurance and medical prescriptions, and cloth and shelter our families,” reasoned Carol Lippman, vice president and portfolio strategist with A.G. Edwards & Sons in St. Louis. “That’s why I want all-weather companies involved in providing all these things.”
Lippman likes the dependable, steady performance of the capital goods stock Emerson Electric (EMR); consumer cyclical firm Fortune Brands (FO); consumer non-durables choice Kraft Foods (KFT); energy company BP Plc. (BP) in oil, natural gas and chemicals; health care firm Johnson & Johnson (JNJ); tech giant IBM (IBM); and utility FPL Group (FPL).
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“We try to get a substantially better return with less volatility,” explained Paul Merriman, editor of FundAdvice.com and president of Merriman Capital Management in Seattle. “The idea of an all-weather portfolio is marvelous, but needs to be personalized to take into account where you’re trying to go and your risk tolerance.”
Weatherproofing your portfolio is also about diversity.
“Right now value investing [the purchase of stocks at depressed prices] is popular and growth isn’t, but the tables may turn, so it’s important to own both,” said Catherine Hickey, analyst with the Morningstar research firm in Chicago. “Also be sure you have funds with large- and small-cap stocks and choose funds whose managers diversify holdings and don’t stick with just one or two industry sectors.”
The best all-weather choices, Hickey believes, include stocks and bonds. In such balanced or hybrid funds, the bond stake dampens the performance swings of stocks. All-weather funds holding stocks and bonds that are suggested by Morningstar include:
– Van Kampen Equity-Income (ACEIX); $2.42 billion; 5.75 percent load; $1,000 minimum; 800-421-5666; five-year annualized return of 12.57 percent.
– Vanguard Asset Allocation (VAAPX); $7.72 billion; no load; $3,000 minimum; 800-662-7447; five-year annualized return of 9.69 percent.
– Gabelli Westwood Balanced Fund (WEBAX); $163 million; no load; $1,000 minimum; 800-937-8966; five-year annualized return of 8.88 percent.
– T. Rowe Price Balanced, (RPBAX); ; $1.79 billion; no load; $2,500 minimum; 800-638-5660; five-year annualized return of 7.83 percent.
– USAA Income Strategy (USICX); $63 million; no load; $3,000 minimum; 800-382-8722; five-year annualized return of 5.94 percent.