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Scared? Rest Easy With This Portfolio

If the emails I've received from readers and the comments left on my blog are any indication, a lot of folks are pretty unnerved by the stock market's recent decline.

So I've constructed a portfolio of exchange-traded funds and mutual funds with returns that have a low correlation to the S&P 500. In fact, this is almost a lazy man's portfolio: The only thing you need to monitor is whether any new products are introduced that will turn out to be better mousetraps.

The benefit of this sort of approach is that you have a good chance of being down less in a bad market. But you will likely be up less the next time the market is up 25% in a year.

PowerShares S&P 500 Buy Write Portfolio (PBP), 30% allocation.

PBP is a proxy for U.S. exposure. It is a new fund that benchmarks to the CBOE Buy Write Index. As you can see from the two-year chart comparing it with the S&P 500, the Buy-Write index feels the ups and downs but does so with reliably less volatility. Over the last 10 years, it has had about 73% of the volatility. So PBP should track the Buy-Write index and also offer some yield (the dividend will be composed of dividends from the 500 stocks in S&P plus the call premium. You can read more about the fund here .

Wisdom Tree Pacific Ex-Japan High Yielding Equity Fund (DNH), 20% allocation.

DNH is mostly invested in Australia and New Zealand. It is not necessarily a low-beta fund, but Australia offers excellent diversification because as a commodity-based country it is usually at a different point in its economic cycle than the U.S.

Moreover, Australia's unemployment rate is going down, not up, and its central bank, the Reserve Bank of Australia, is mulling whether to raise rates, while the Fed has been lowering rates.

As I wrote here , I prefer DNH over the iShares MSCI EAFE Index Fund (EFA) for several reasons including its higher yield and lower correlation to the U.S. market.

iShares S&P Global Infrastructure Index Fund (IGF), 5% allocation.

I wrote about this fund a few weeks ago in the hope that it would offer results that do not correlate to the U.S. stock market. So far the correlation has been 0.52, and since inception in mid-December, IGF is down only 8% vs. 12% for the S&P 500. While that may not sound great, remember that the goal is to be down less.

The idea here is that regardless of cycles and market action, infrastructure spending will continue. I would not hold out false hope that infrastructure stocks could somehow go up when everything else is going down, but I believe there is a fundamental case for them going down less and generally being less volatile.

iPath DJ AIG Agriculture Total Return Sub Index ETN (JJA), 5% allocation.

Commodity exposure is a great way to reduce a portfolio's correlation to the S&P 500. Since inception, JJA has had a negative 0.163 correlation to the S&P 500, and it's up 20% through Friday, vs. an approximate 15% decline for the S&P 500.

The reason I am going with food over gold is that I buy into the notion that food will become a more precious commodity as demand increases. JJA and other investments that track agriculture prices are all up a lot lately, and while they could be volatile, they should continue to have very little correlation to U.S. stocks.

(NARFX) (NARFX), 10% allocation.

Nakoma is an actively managed long/short fund that has a correlation of just 0.292 to the S&P 500 with about a quarter of the volatility. I interviewed the fund's managers last fall and came away very impressed. Like the hedge fund that preceded it, NARFX has a track record of very slow and steady gains.
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SYM TRADE IT LAST %CHG
BWX $51.91 0.00%
IGF $40.81 0.00%
JJA $36.18 0.00%
PBP $21.60 0.00%
TIP $112.65 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

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