A Portfolio for Those Who Just Give Up

In every bear market, some folks decide they aren't cut out for stock market investing. However, that realization doesn't eliminate the need to save for the future and have that savings grow at a reasonable rate.

This got me thinking about what these folks could do, and I came up with the "I Give Up" portfolio.

The portfolio has very few holdings, should be less volatile than the market and will hopefully be a decent holding place. Of course, bear markets come and go, they tend to be similar to past bear markets, and eventually give way to a new bull market, so investors who give up should still consider getting back in the game at some point.

But in the meantime...

Gateway Fund ( GTEYX) -- 30%

This is the no-load version of the more-well-known GATEX. Gateway is a call-writing fund, but unlike some of the other products in this space I have written about previously, GTEYX is actively managed. The managers have done a good job of being less volatile than not only the S&P 500 but also the CBOE Buy Write Index, which is the benchmark index for this type of fund.

GTEYX is down 5% since the market peaked, vs. a 20% decline for the S&P 500. The expectation for this fund should be that it will outperform the S&P 500 during down and flat markets, be about the same when the market is up a little and lag when the market is up a lot.

Rydex Managed Futures Fund ( RYMFX) -- 30%.

I have written about this fund several times as a vehicle for absolute return that should do its thing regardless of what the stock market is doing. The fund allocates 50% to commodity futures and 50% to financial futures, then goes long or short various components from each segment on the basis of seven-month relative strength.

Over the last year, it is up 7% vs. a 15% decline for the S&P 500. The fund is down over the last six weeks or so, as it was long the energy complex, which turned course suddenly and has been moving lower.

Templeton Emerging Markets Income Fund ( TEI) -- 20%.

The track record for this fund is long and phenomenal. The net asset value of the fund has had only two down years since inception in late 1993. In 1998, during the Asian contagion, the NAV was only down 8.95%. The market price has had three down years since inception. The fund is currently trading at a 5.7% discount to NAV with a 7.29% yield.

The fund is heaviest in Brazil at 19.7%, is invested in Indonesia at 11.60%, and interestingly, it even has a position in bonds from Iraq.

The segment is obviously volatile, but buying this fund simply expresses a belief that the management can continue to navigate the space successfully; 14 years of track record leads me to believe that it can.

I believe TEI can offer equitylike total returns without being correlated (PortfolioScience.com has the correlation at 0.41 to the S&P 500) to the U.S. markets.

iShares Lehman Brothers TIPS Bond Fund ( TIP) -- 20%.

If you believe deflation is a big threat, or cannot forgive what certainly seems like the government's understating of inflation, this fund is not for you.

Over its history, it has been a fairly boring hold (which is the desired effect), paying out a variable stream of income to shareholders. The income varies because the consumer price index varies, and there have been months where there have been no payments.

The payout is comprised of the actual coupon payment plus the inflation adjustment (verified with a call to iShares). If you believe inflation (understated though it may be) will head higher then the payout from the fund should increase but it does change from month to month.

To be clear: the "I Give Up" portfolio is no substitute for a diversified portfolio for people who have normal tolerances for volatility -- but not everyone has a tolerance for the ups and downs of the stock market. This mix covers several bases with a reasonably long track record of decent returns with low volatility.

Anyone interested in pursuing this type of approach will lag the market when it is up a lot, and should plan on increasing their savings rate.

At the time of publication, Nusbaum was long RYFMX and TIP on behalf of himself and/or clients, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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