Where to (Maybe) Turn for Shelter as Stock Prices Fall
The never-say-die bull market is suddenly clutching its chest and wheezing. And if Tuesday’s stock sell-off is followed by more of the same today, some investors may start wondering whether--and how--to look for some shelter from a possible market storm.
Should stocks dive further, the first point to remember is that this bull market is way overdue for a normal “correction” that could shave 10% or more off major indexes like the Dow industrials.
Measured from the Dow’s recent peak of 5,216.47, a 10% decline would be 522 points, trimming the index to about 4,690. After the Dow’s 33.5% surge last year, a temporary 10% giveback would be nothing unusual by historical standards.
But corrections are never pleasant affairs, no matter how routine they may be. If every investment in your portfolio is sinking--and quickly--you may be more inclined to panic and lose sight of your long-term goals.
Which brings up the idea of a “hedge”: If you have some portion (say, 10% to 15%) of your portfolio in investments designed either to buck the stock market trend or fall much less than the market, you may feel far more comfortable weathering a pullback in the rest of your portfolio.
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Unfortunately, there is no perfect stock market hedge--one that works every time. “The concept is El Dorado, but I haven’t found it,” quips Michael Lipper of mutual fund tracker Lipper Analytical Services in New York, referring to the mythical South American gold hoard.
There are, however, some investments that may provide a reasonable hedge. Here’s a look at some ideas for today’s hedge-seekers:
* Commodity plays. So far this year, gold and energy prices have been rising while stocks in general have weakened. The gains in those commodities have helped boost some mutual funds that have invested heavily in gold mining stocks or natural resource companies. The T. Rowe Price New Era natural resources fund in Baltimore, for example, is up 3% since Dec. 31; some gold mining funds are already up more than 10%.
But aside from some brief rallies in recent years, gold and energy funds have been dogs. Reason: They are typically inflation hedges, “and if there’s no inflation those hedges become problematical,” says Sheldon Jacobs at the No-Load Fund Investor newsletter in Irvington-on-Hudson, N.Y.
What’s more, if the stock market overall is weakening because of recession worries, neither gold nor energy prices may hold up for long. Similarly, real estate funds, another favorite “hard asset” hedge, aren’t likely to perform well if recession fears mount and property values fall.
* Funds that “short” the market. A handful of mutual funds use short-selling techniques that involve selling borrowed securities, betting on a market decline. If prices plunge, these funds profit. But if prices rebound, the funds can suffer.
The Crabbe Huson Special fund in Portland, Ore., was short certain high-flying technology stocks for much of 1995--a bad bet at the time. But that bet now is paying off: The fund is up 4% this year. The Robertson Stephens Contrarian fund in San Francisco, the Lindner Bulwark fund in St. Louis and the Rydex Ursa fund in Bethesda, Md., also short the U.S. stock market.
But it’s important to note that most of these funds go short with only a portion of their assets. The majority of their dollars tend to be in Treasury bills, gold stocks, bonds or stocks that the managers believe are relatively immune to big market declines. Before you invest in one of these funds for hedging purposes, you should be sure you’re comfortable with the entire portfolio.
* Foreign stock funds. So far in ’96 many foreign stocks have risen while U.S. shares have sunk. But this hedge is also dicey: It’s often tough for foreign markets to advance if the biggest market of all (the U.S.) tanks severely.
Likewise, while U.S. bonds at times can provide a hedge, long-term yields are rising so far this year.
Some experts say the best hedge of all is just to build up cash, perhaps selling 10% to 20% of your stocks and waiting for lower prices to buy. “Cash always does a good job as a hedge,” notes Eric Kobren at Fidelity Insight letter in Wellesley, Mass.
In the long run, the easiest way to hedge against trouble--and hedge against your emotions getting the best of you--is simply to be well-diversified, says John Markese, director of the American Assn. of Individual Investors in Chicago. Specific hedges, he says, can be expensive and ultimately useless crutches. “You shouldn’t own anything you don’t want to hold long-term,” he argues.
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Hedging Ideas?
These mutual funds either focus on “contrarian” strategies--such as “shorting” the stock market--or invest in areas such as commodities or real estate, which may buck a general market downturn. *--*
Total return: Fund 1995 1996 R. Stephens Contrarian +30.9% +9.1% Lindner Bulwark -11.0% +7.3% Dreyfus Capital Value A -3.1% +4.9% Crabbe Huson Special +10.8% +4.0% T. Rowe Price New Era +20.8% +3.0% Comstock Partners Strat. A +4.0% +2.4% Rydex Ursa Fund -20.1% +1.7% Fidelity Real Estate +10.9% +0.4% S&P; 500 stock index +37.5% -1.1%
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Source: Lipper Analytical Services
