As Stocks Rise, Consider Getting Conservative
BOSTON (TheStreet) -- If you worry that stocks could be due for a pullback, consider conservative-allocation funds. They protect shareholders by putting less than half their assets in stocks and the rest in fixed income.
The cautious formula can limit losses in downturns -- and deliver decent results in bull markets. During the 12 months through Aug. 7, allocation funds lost 4.6%, a solid record in a period when the S&P 500 declined 20.5%, according to Morningstar.
While all conservative-allocation funds have big fixed-income holdings, they follow a variety of strategies. Some portfolio managers maintain static allocations, typically keeping about 60% of assets in investment-grade bonds. Other funds range widely, shifting their holdings as conditions change and investing in junk bonds and small stocks.
Among the safest choices is Vanguard Wellesley Income (VWINX). The fund usually keeps about 40% of assets in dividend-paying stocks and the rest in cash and investment-grade corporate bonds. The recipe may sound stodgy, but the fund has returned 5.9% annually during the past 10 years, outdoing 95% of its conservative-allocation peers and surpassing the S&P 500 by more than 7 percentage points.Besides seeking to produce capital appreciation, the Vanguard portfolio managers aim to generate steady income. They have achieved their goal, routinely delivering annual dividend yields of more than 4%. The fund currently yields 4.9%, an attractive payout at a time when 10-year Treasuries yield 3.75%. For some more juice, try Berwyn Income (BERIX), which has returned 7.3% annually during the past decade and currently yields 5%. The fund typically keeps about 30% of assets in stocks and the rest in a mix of fixed-income securities.
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