The burn-offs in the markets continue, and that has investors eager to find additional ways to protect their investments from whiplash.
In my last article,
How to Protect Yourself From the Selloff, I showed that stocks with low prices relative to earnings and stocks with high dividend yields have historically tended to outperform other equity investments.
Those two kinds of equity investments also sustained lower hits in May and, thus far, in June during the recent selloffs.
, which posted a recent high of 11,643 on May 10, closed Friday, June 9, at 10,892. That's a 6.5% decline for a period of just over a month, and a 3.2% drop in the last week alone.
So, what else can you do to protect yourself?
Here are three tactics that will also help you shield your savings from the full brunt of additional damage.
If you hold "growth" funds or indices, move to "value" holdings -- ideally when there is some market rebound
Here is how several "growth" funds and exchange-traded funds, or ETFs, have performed relative to "value" ETFs and funds.
"Growth" funds and ETFs focus on stocks with strong future potential based on the estimates of
by Wall Street analysts. "Value" funds focus on stocks with low prices relative to
over the last 12 months.
As a general rule, "value" funds tend to deliver better performance in times like these. And as the table below also suggests, this is a good time to consider enlarging your international exposure -- provided you avoid overvalued "emerging market" funds, which are likely to suffer further corrections.
Stay clear of long-duration bond funds. Move to "short" or "ultra-short" bonds
Inflation is building. Inflation gains in 2005 were the highest in five years. Readings in 2006 show inflation gaining added strength, prompting
Chairman Ben Bernanke to somberly describe the increases as "unwelcome developments." Count on it: higher interest rates are coming. This is one of the main reasons investors have gotten jittery about stocks.
Holders of long-duration bonds will be hurt if and when interest rates move higher. Don't put yourself at risk. It's time to stay in short- and ultra-short-duration bonds and Treasuries.
If you currently hold bond indices or funds that have a diversified mix of bond tenors or maturities, move out. Instead, consider funds such as
State Farm Interim
Goldman Sachs Ultra-Short Duration Government Bond
, load waived (GSAMX), and
STI Classic Short-Term Bond A
(STSBX). You want funds that narrowly focus on short-duration paper. Otherwise, you'll hold a "maturity mix" that has loss potential.
Focus on "low debt" stocks
Rising interest rates will, of course, impact corporate earnings. Companies with low amounts of debt are going to fare better than high-debt companies if and when interest rates rise. Companies with low debt will have lower "core" expenses. So, when you consider stocks at this particular time, you should be looking at companies with low debt relative to capital.
Two stocks that Morningstar reports as having particularly low debt-to-capital ratios, as well as price/earnings ratios of less than 15 right now are
. But there are many others. And you need to factor in debt expense.
If you hold equity funds, take the time to use online research to check into the largest stock holdings of the fund. Check whether the fund is top-heavy in the stocks of companies with high debt. If it is, you want to move to a less vulnerable fund offering. In a rising interest rate market, you want stocks or funds with low price/earnings ratios and low debt.
: Other than exiting from the stock or bond markets altogether, there is no magical strategy that will wholly protect you from market gyrations. But when the stock market experiences turbulence or correction, you're better off seeking the high ground of "fundamental value" and dividends. And when inflationary pressure builds, you want the high ground of short-duration bonds and the stocks of low-debt companies.
At the time of publication, Schlagheck was long Vanguard Value Index.
Jim Schlagheck is a wealth management professional who has counseled ultra-high-net-worth families, endowments and pension funds in the U.S., Europe, and the Middle East. He is a former senior executive of American Express Bank, UBS AG, Bank Julius Baer, and TAIB Bank. During his career, Schlagheck launched a family of mutual funds (now holding $4 billion), led teams of financial planners and investment advisers based in New York, Bahrain, and Geneva, Switzerland, and helped many high-profile clients to protect and enlarge their wealth. Jim has a blog on investment topics
www.invest-blog.com and is the author of "Show Me The Money!", a soon-to-be-published book that synthesizes his novel views about investing for retirement.