Page 13 - Kiplinger's Personal Finance - November 2018
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change in principal value—most types
of bond funds are either in the red
Playing Defense
or barely positive for the year so far.
The culprit, of course, is the Fed. As Not All Stock Sectors Get Mauled
it raises short-term interest rates in
the strong economy, it drives down In a bear market, nearly all stocks fall. But some hold up much better than others. Here are
the principal value of older fixed-rate average bear market declines for Standard & Poor’s 500 index industry sectors since 1946:
bonds and pushes up their yields.
Consumer Consumer
That’s part of the logic of rebalancing staples Health care Utilities Energy Materials Financials Technology discretionary Industrials
your portfolio by trimming stocks
and buying bonds: You’re taking prof-
its in stocks to pick up higher yields
on fixed-income assets. Still, it can be
hard to trade a winning investment –10%
for one that’s almost certain to come –13%
under price pressure.
With the Fed planning more rate
hikes in 2019, there are defensive –20%
moves you can make with bonds. One
is to keep most of your bond allocation –24% –25%
in short- or intermediate-term, high- –27% –28%
quality bonds rather than in longer- –30%
term issues. If market interest rates –32%
SOURCE: CFRA
continue to rise, the shorter a bond’s
time to maturity, the smaller the
decline in principal value caused by The second argument for holding TIPS are best owned in tax-deferred
higher rates. The trade-off is that bonds is for insurance: If some calam- accounts. Buy them directly from
you’ll earn a lower current yield on ity were to suddenly rock the economy Uncle Sam at www.treasurydirect
shorter-term bonds than on longer- and the stock market, it’s likely that .gov, or check out VANGUARD INFLATION-
term issues. Funds that focus on inter- money would pour into the relative PROTECTED SECURITIES (VIPSX).
mediate-term bonds, which mature safety of high-quality bonds, pushing
in five to 10 years, are a good compro- prices up and yields down. In the AN ALTERNATIVE HEDGE
mise, and among these it’s hard to midst of the financial crisis a decade Investors looking for a buffer in a
beat DODGE & COX INCOME (DODIX, YIELD ago, high-quality bonds bucked the rough stock market might consider
3.2%). The actively managed fund’s downtrend. The Bloomberg Barclays alternative funds. These funds use
total return has trounced the average U.S. Aggregate Bond index returned often-complex strategies aimed at gen-
intermediate-term bond fund over the 5.2% in 2008, compared with a nega- erating returns unrelated to moves in
past three, five, 10 and 15 years. tive 37% total return for the S&P 500. stock and bond markets overall.
Another defensive move is to shift The greatest danger to bonds and In general, investors should think of
part of your bond allocation to cash stocks alike would be a sudden accel- alt funds as a potential portfolio cush-
accounts, such as money market mu- eration in inflation that would force ion, not a huge moneymaker. Laura
tual funds, which have very low risk the Fed to hike rates aggressively, says Tarbox, a CFP at Tarbox Family Of-
of principal loss. The average money Bob Doll, chief stock strategist at fice, uses alternative funds for about
fund was recently yielding 1.6%; we Nuveen Asset Management. For years, 15% of clients’ assets. She doesn’t ex-
like VANGUARD PRIME MONEY MARKET FUND “Low inflation has been financial as- pect the alt funds to shoot the lights
(VMMXX), yielding 2.1%. sets’ best friend,” Doll says. If markets out. “We’re looking for 6% to 8% an-
But nervous investors should fight sense that that era is over, “you’d want nual returns, completely uncorrelated”
the urge to hunker down in too much to own fewer bonds and stocks both.” to the stock market, she says.
cash. The argument for holding bonds One exception: Treasury inflation- There are plenty of caveats with
instead of going entirely into green- protected securities, or TIPS. The these complex investments, including
backs is twofold. First, if it’s income principal value of these bonds is guar- typically high management fees. Some
you need, bonds provide more of it anteed to rise with inflation. If you alt funds charge 2% or more annually.
than cash accounts, with the yield on a don’t own TIPS, this is a good time to Nonetheless, we think some funds are
five-year Treasury note recently 2.9%. buy them, as inflation creeps higher. worth considering now. SCHWAB HEDGED
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