Some Possibilities for Conservative Investors
There’s no law that says stock market investing has to be a harrowing experience.
Dozens of equity-oriented funds are pretty consistent, disproving the notion that you always have to take big risks to earn attractive returns. That’s good news for ultraconservative investors, such as those pulling their money out of bank accounts for the first time.
Pure stock funds can be fairly scary, of course. But by adding bonds or options to hedge against devastating losses, managers can produce much more stable results.
A handful of these “all-weather” portfolios haven’t lost money in any calendar year dating back more than a decade.
One word of caution, however: Ultraconservative stock funds don’t necessarily make the best bets long term.
“While it’s comforting to know you can pick a fund with only a small likelihood of declines on an annual basis, if you are willing to accept greater temporary losses, you are likely to achieve far better long-term performance results,” says Sheldon Jacobs, publisher of the No-Load Fund Investor newsletter in Hastings-on-Hudson, N.Y.
As noted, some of the low-risk funds accomplish their goals by holding a large weighting of bonds together with stocks. Fixed-income investments don’t fluctuate as much as equities, so the combination helps smooth out the funds’ overall returns.
Over the past five years, bonds have actually posted slightly higher gains than stocks--an unusual occurrence that has boosted the relative performance of these “balanced” funds.
But longer term, stocks have done better. Over the 30 years through June 30, for example, the average stock fund rose at an 11.1% compounded yearly rate, compared to 7.9% for bond portfolios, says Lipper Analytical Services, a research firm in Summit, N.J.
Risk-averse investors should be aware that there’s no single list of ultraconservative funds. You can choose different ways--and different time periods--to measure volatility.
One easy approach is to check which funds haven’t lost money in, say, any of the past 10 years.
From 1982 through 1991, an exceptionally good period for the stock market, 22 equity-oriented funds met this standard, according to data compiled by Morningstar Mutual Funds, a Chicago research publication.
But by examining the same 10-year period plus the first half of 1992, when most funds showed small losses, you would narrow the list to just nine.
Excluding FPA Paramount, a Los Angeles-based fund that’s closed to new investors, the others are:
Analytic Optioned Equity (800-374-2633), Dodge & Cox Balanced (415-434-0311), Eaton Vance Investors (800-225-6265), Federated Stock & Bond (800-245-5000), Merrill Lynch Capital (800-637-3863), Phoenix Balanced (800-243-4361), Putnam Growth & Income (800-225-1581) and Sentinel Balanced (800-282-3863).
Most of these funds invest anywhere from one-quarter to one-half of their assets in bonds, often complementing this with a stock-picking approach that focuses on undervalued companies.
The one notable exception is Irvine-based Analytic Optioned Equity, which uses options to hedge a fully invested stock portfolio.
Load funds sold through brokerages and financial planners dominate this list. Only Analytic Optioned Equity, Dodge & Cox Balanced and Federated Stock & Bond can be purchased commission-free.
A more sophisticated way to examine risk is with a statistical tool known as “standard deviation.” In brief, this tells by how much a fund’s monthly return can be expected to fluctuate from its norm. Higher numbers imply more volatility and lower numbers, less.
From a standard-deviation basis, Gateway Index Plus (800-354-6339), Lindner Dividend (314-727-5305), the Mathers Fund (800-962-3863) and Stagecoach Asset Allocation (800-222-8222) are among the least volatile equity-oriented portfolios, according to Morningstar.
Three of the four--Lindner Dividend, Mathers and Gateway Index Plus--don’t charge any commissions. The latter, like Analytic Optioned Equity, uses options to reduce the risk of holding stocks.
With any conservative fund, you will likely sacrifice some upside potential in return for stability. But the better portfolios, including many of the ones discussed above, have delivered competitive long-term results while subjecting shareholders to less risk.
That’s why they may make good choices for conservative investors who don’t want their first stock-market foray to be their last.
