Finding Shelter From the Storm

Stock mutual funds were all wet in 2008. Heres where to invest now to avoid getting soaked.

Sticking with stocks
Yes, it’s a bold option. Certainly last year showed that stock funds aren’t safe—by any definition. Yet it’s safer to invest in stock funds now than it was in, say, 2007, when the market peaked and investors poured in billions of dollars. “Stock funds look really cheap at this time relative to other times,” says Bold. “It’s hard to buy when the market is down 40% to 45%, but that’s the way to build wealth: buying low and selling high.” And investors today are certainly buying at discount prices. At the 2007 peak, the price-to-earnings ratio of the S&P 500 was around 24. Today, it’s about 19. For long-term investors, stocks and stock funds are on sale now.

That view is shared by Lance Dottin, 39, a teacher and coach in Cambridge, Massachusetts. “I’ve been investing in mutual funds since the early 1990s,” he says. “I’ve seen stock funds go up and down. They’re down now but I’m confident the stock market will come back by the time I retire, which probably won’t be for many years.” Dottin has 85% of his portfolio in stock funds, according to his adviser, Andrew Ward of Baystate Financial Services L.L.C. in Boston, who has recommended that Dottin stay the course. What types of stock funds look promising now?

Value funds.
These funds hold shares of major companies selling at depressed prices. “Typically,” says Bold, “the conservative way to approach equity investments is to purchase shares of large-cap value funds, which tend to own the largest, most stable companies.” Among the funds Corrie holds in her deferred compensation plan, for example, are American Century Value Investors (TWVLX), which focuses on large companies, and T. Rowe Price Small-Cap Value (PRSVX), which invests in smaller firms. They boast 10-year returns of 3.97% and 8.42% respectively.

Sector funds.
“When the economy is in a recession, certain types of companies do relatively well,” says Bob Johnson, associate director of economic analysis at Morningstar. “Funds that specialize in those sectors may hold up in 2009.” Johnson points to healthcare, for example, as a generally recession-resistant industry because people will still get sick, go to doctors, and fill drug prescriptions. “This sector lost less than the broad market last year,” he says. “Some of the major pharmaceutical companies are flush with cash, so they should be able to maintain their dividends.” Morningstar’s picks in this category are T. Rowe Price Health Sciences (PRHSX), which carries a 10-year return of 6.4%; Hartford Global Health A (HGHAX); and Vanguard Health Care (VGHCX), which has tallied a 7.9% 10-year return.

Johnson also is upbeat about utilities. “People still need electricity,” he says. “Typically, these companies can count on relatively steady revenues. Dividends may be substantial, too.” For “pure, no-frills utility exposure,” Morningstar says of Franklin Utilities Fund (FKUTX) that it “focuses almost exclusively on domestic regulated utilities with solid yields and stable returns, and such safe havens have become popular amid the market volatility.”

There might not be any guaranteed shelter from the storm among mutual funds, but some funds have lower risks than others. By including these safer havens in your portfolio, you may be able to ride out the scary times and cash in once the clouds have parted.

This story originally appeared in the 2009 issue of Black Enterprise magazine.

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