John Wasik

By John Wasik

(Reuters) – To most Main Street investors, the post-2008 era has been something of an epic hangover. By and large, they have continued to eschew stocks for the palliative comfort of bonds.

Was it worth sitting out the last few years? What has actually been going on here since 2009, although it has been well-disguised at times, is a bull market. While the course of the bull has been highly uneven, it may continue if corporate earnings remain solid and there are no major calamities. And it may gain even more momentum if the new round of Fed easing boosts the U.S. economy in a significant way.

Of course, the euro zone muddle, lagging U.S. employment, meager consumer confidence and unseen other crises do not bode well for stocks. They never do. Yet there is the strong possibility that U.S. stocks will continue to head higher, defying the worst headlines.

First, some needed perspective. Stocks are still risky investments and always will be, although the best time to buy them is often when public perception is pessimistic. Share prices reflect real expectations of earnings, dividends and growth in what the underlying companies sell. The market is more volatile than in the past due to robotic, high-frequency trading and global news that travels at the speed of light. If you want something predictable to calm your nerves, buy a dog or cat.

Yet most large companies are profitable now and are sitting on a total combined estimate of $2 trillion in cash, which they are loath to spend on hiring and capital equipment. Consumer demand is not quite robust enough for their collective taste as most of the industrialized world deleverages.

Despite the anomaly between sour investor sentiment and generally strong corporate earnings, the bull market continued apace. As of September 6, the upsurge in the S&P 500 Index that commenced on March 9, 2009, had run 42 months for a 112 percent gain, the Leuthold Group reported in its latest “Perception” newsletter. That handily beat the average bull-market advance of 83 percent in rallies between 1929 and 2009.

The most recent advance comes close to the average bull-market run of 45 weeks for that period, Leuthold found. Overall, the recent ascent ranks as the sixth-largest since the beginning of Franklin Delano Roosevelt’s first term.

Even more surprising is that other huge rallies have occurred when the economic outlook was bleak. The biggest run-up was from June 1, 1932, to March 6, 1937 – 318 percent – during the early years of the Great Depression. Maybe that comeback was more psychological as FDR bucked up the country during the early New Deal years. After 1937, though, there was not another triple-digit bull run until 1942 when the country was headlong into war production.

WHAT COULD ROPE THE BULL

What will pull the legs out from under the bull’s charge? There has been all too much conventional wisdom that if the Democrats regain their hold on the White House and Senate, that will trigger a decline. Conversely, if tax-cutting Republicans capture the White House and Congress, that will trigger a stock rally.

If you are waiting for either party to win, you could be missing profitable opportunities. Leuthold finds no meaningful difference in the return of the S&P 500 Index under the stewardship of either party – going back to 1928. (Note: Prior to 1957, when S&P launched its index of 500 stocks, the company used other capitalization-weighted stock indexes with fewer stocks, dating back to 1923.)

The S&P Index shows a median return of 27.5 percent for Democrats and 27.3 percent under Republicans. The ten biggest rallies are evenly split between the GOP and Democrats, with the first term of FDR and Obama and both Clinton terms topping the list. The markets likely fully priced in the likelihood of a winner before each election, so when the ballots were counted, large investors had long since made their moves.

And contrary to public opinion, having some bumps in a bull market promotes buying opportunities. Since a pullback that lasted from April through June, investor sentiment has rebounded.

Notes Sam Stovall, chief equity strategist for S&P Capital IQ in its September 10 Outlook, “Since 1945, whenever the S&P 500 Index has recovered from a pullback (decline of 5 percent to 10 percent), it recorded an additional average price advance of 4.6 percent (median) and 7.8 percent (mean) in approximately six months. Therefore, if history repeats itself – and there’s no guarantee it will – the S&P 500 could advance to between 1,500 and 1,550 before year end.”

The S&P 500 Index was down 0.3 percent at 1,457 on Tuesday afternoon. The index is up about 15.6 percent so far this year.

Even if you cannot muster an ounce of passion for stocks right now, you should consider how they fit into your portfolio. If you still need growth and/or dividends, they should be a core holding to take advantage of market gains.

Are you focused on income and lower volatility? Consider the SPDR S&P Dividend ETF, which invests in the 60 highest-yielding stocks in the S&P 500 Index. A similar fund – the PowerShares International Dividend Achievers ETF – provides more global exposure.

Other than geopolitical gremlins in the euro zone and a major slowdown in China, the major roadblocks to a continuing rally are the health of the U.S. and European economies. Consumer demand and employment are the sputtering engines hobbling both regions at the moment. The “fiscal cliff” of the Bush-era tax cuts expiring at the end of the year is also a concern, although we may see some less-bovine movement on that after the election.

(The author is a Reuters columnist. The opinions expressed are his own.)

(Editing by Lauren Young and Matthew Lewis)

Sept 18 (Reuters) – To most Main Street investors, the
post-2008 era has been something of an epic hangover. By and
large, they have continued to eschew stocks for the palliative
comfort of bonds.

Was it worth sitting out the last few years? What has
actually been going on here since 2009, although it has been
well-disguised at times, is a bull market. While the course of
the bull has been highly uneven, it may continue if corporate
earnings remain solid and there are no major calamities. And it
may gain even more momentum if the new round of Fed easing
boosts the U.S. economy in a significant way.

Of course, the euro zone muddle, lagging U.S. employment,
meager consumer confidence and unseen other crises do not bode
well for stocks. They never do. Yet there is the strong
possibility that U.S. stocks will continue to head higher,
defying the worst headlines.

First, some needed perspective. Stocks are still risky
investments and always will be, although the best time to buy
them is often when public perception is pessimistic. Share
prices reflect real expectations of earnings, dividends and
growth in what the underlying companies sell. The market is more
volatile than in the past due to robotic, high-frequency trading
and global news that travels at the speed of light. If you want
something predictable to calm your nerves, buy a dog or cat.

Yet most large companies are profitable now and are sitting
on a total combined estimate of $2 trillion in cash, which they
are loath to spend on hiring and capital equipment. Consumer
demand is not quite robust enough for their collective taste as
most of the industrialized world deleverages.

Despite the anomaly between sour investor sentiment and
generally strong corporate earnings, the bull market continued
apace. As of Sept. 6, the upsurge in the S&P 500 Index
that commenced on March 9, 2009, had run 42 months for a 112
percent gain, the Leuthold Group reported in its latest
“Perception” newsletter. That handily beat the average
bull-market advance of 83 percent in rallies between 1929 and
2009.

The most recent advance comes close to the average
bull-market run of 45 weeks for that period, Leuthold found.
Overall, the recent ascent ranks as the sixth-largest since the
beginning of Franklin Delano Roosevelt’s first term.

Even more surprising is that other huge rallies have
occurred when the economic outlook was bleak. The biggest run-up
was from June 1, 1932, to March 6, 1937 – 318 percent – during
the early years of the Great Depression. Maybe that comeback was
more psychological as FDR bucked up the country during the early
New Deal years. After 1937, though, there was not another
triple-digit bull run until 1942 when the country was headlong
into war production.

WHAT COULD ROPE THE BULL

What will pull the legs out from under the bull’s charge?
There has been all too much conventional wisdom that if the
Democrats regain their hold on the White House and Senate, that
will trigger a decline. Conversely, if tax-cutting Republicans
capture the White House and Congress, that will trigger a stock
rally.

If you are waiting for either party to win, you could be
missing profitable opportunities. Leuthold finds no meaningful
difference in the return of the S&P 500 Index under the
stewardship of either party – going back to 1928. (Note: Prior
to 1957, when S&P launched its index of 500 stocks, the company
used other capitalization-weighted stock indexes with fewer
stocks, dating back to 1923.)

The S&P Index shows a median return of 27.5 percent for
Democrats and 27.3 percent under Republicans. The ten biggest
rallies are evenly split between the GOP and Democrats, with the
first term of FDR and Obama and both Clinton terms topping the
list. The markets likely fully priced in the likelihood of a
winner before each election, so when the ballots were counted,
large investors had long since made their moves.

And contrary to public opinion, having some bumps in a bull
market promotes buying opportunities. Since a pullback that
lasted from April through June, investor sentiment has
rebounded.

Notes Sam Stovall, chief equity strategist for S&P Capital
IQ in its Sept. 10 Outlook, “Since 1945, whenever the S&P 500
Index has recovered from a pullback (decline of 5 percent to 10
percent), it recorded an additional average price advance of 4.6
percent (median) and 7.8 percent (mean) in approximately six
months. Therefore, if history repeats itself – and there’s no
guarantee it will – the S&P 500 could advance to between 1,500
and 1,550 before year end.”

The S&P 500 Index was down 0.3 percent at 1,457 on Tuesday
afternoon. The index is up about 15.6 percent so far this year.

Even if you cannot muster an ounce of passion for stocks
right now, you should consider how they fit into your portfolio.
If you still need growth and/or dividends, they should be a core
holding to take advantage of market gains.

Are you focused on income and lower volatility? Consider the
SPDR S&P Dividend ETF, which invests in the 60
highest-yielding stocks in the S&P 500 Index. A similar fund -
the PowerShares International Dividend Achievers ETF -
provides more global exposure.

Other than geopolitical gremlins in the euro zone and a
major slowdown in China, the major roadblocks to a continuing
rally are the health of the U.S. and European economies.
Consumer demand and employment are the sputtering engines
hobbling both regions at the moment. The “fiscal cliff” of the
Bush-era tax cuts expiring at the end of the year is also a
concern, although we may see some less-bovine movement on that
after the election.

CHICAGO, Sept 14 (Reuters) – The Federal Reserve’s new round
of quantitative easing may have sparked as much early enthusiasm
as the opening of a new fall fashion show. Yet as with other
ballyhooed events, the initial warm reception may prove
fleeting.

The Fed’s latest buying spree of Treasury and
mortgage-backed securities will keep U.S. interest rates low and
drop them incrementally lower. And Wall Street
initially cheered the Fed by propelling both the Dow Jones
industrial average and the S&P 500 Index to their
highest levels since 2007 on Thursday. The once-battered Nasdaq
Composite Index even climbed to its highest level since
November 2000.

On the employment, manufacturing and housing fronts, though,
there is only so much the Fed can do to revive those markets -
and it will do nothing to fix the euro zone – so don’t take
Thursday’s rally too seriously. By adopting a tandem strategy of
targeted hedging and global investing, you can still ride out
continuing anxieties in Washington and Europe. And there are
side effects to this stimulus, too. So if you are looking for
investing strategies, you might want to employ some of these
hedges:

1. Think inverse

Fed easing typically means the dollar’s value against other
currencies is likely to drop and commodities including precious
metals will gain. If you are concerned about further hits to the
buck, there is something you can do about it. There is an
“inverse” exchange-traded fund for the dollar, the PowerShares
DB US Dollar Index Bearish ETF, which uses futures
contracts to short the dollar. Gold also does well when the
greenback sinks. Consider the SPDR Gold Trust, which
holds gold bullion and tracks the price of the metal fairly
closely.

Note: these ETFs are complex and volatile vehicles that
should be used only if you need to protect your portfolio
against large currency swings. Currencies and metals are
notoriously difficult to predict; never think you have the
ability to successfully time this market.

2. Bet with your head, not over it

Since it is always difficult to bet against something – you
need a trader’s steely nerves to know when to get in and out -
it is a much better strategy to invest for long-term
appreciation. Financial service companies certainly will relish
and profit from the low Fed rates for a few more years, barring
another derivatives-fueled calamity. Consider the iShares Dow
Jones US Financial ETF, which holds financial giants
such as JP Morgan Chase & Co, Wells Fargo & Co
and American Express Co.

3. Think international

The Fed stimulus also bolsters the balance sheets of large
multinational companies. If you are a corporate treasurer, this
is a great time to keep borrowing at some of the lowest rates in
a generation, expand into more global markets and invest in
research and development.

The Vanguard Mega Cap 300 Index ETF provides a
sampling of the largest U.S.-based companies such as Apple Inc
, Exxon-Mobil Corp, General Electric Co
and Procter & Gamble Co. Most of these companies are
cash-rich and have a growing global presence.

4. Beware of politics

What could derail the first-blush QE3 euphoria is the
inability of Congress and the White House to come to terms on
the looming fiscal cliff, when U.S. taxpayers may get hit with
about one-half trillion dollars’ worth of tax increases
resetting from Clinton-era levels on Jan. 1. The Fed’s actions
will have no direct impact upon Congressional logjams.

Falling off the cliff will be perilous for the struggling
U.S. economy, possibly even triggering a recession if Congress
does not act. The situation is so threatening that the
Congressional Budget Office recently estimated that some 2
million jobs will be lost and U.S. economic growth will be
pinched by nearly 3 percent if all the tax increases on income,
dividends, capital gains, payroll and estates go into effect.
The ratings agency Moody’s also threatened to lower the top
credit rating for the United States if its even larger budget
issues are not resolved soon.

While the Fed’s program to buy Treasury and mortgage
securities may be bullish for big borrowers and lenders, it is
likely to have little impact on household wealth, especially if
there is no strong rebound in housing. The Obama administration
has yet to announce what it plans to do with Fannie Mae and
Freddie Mac, the two quasi-public mortgage companies that
account for the lion’s share of new mortgage volume. Freddie and
Fannie were seized by the U.S. Treasury in late 2008 during the
financial meltdown.

What you will need in great supply is patience, as it
appears that none of Washington’s fiscal perils will be resolved
soon. Congressional observers see little, if any, meaningful
action on budget or tax issues before the Nov. 6 election.
Europe is still a work in progress. In the interim, anxiety over
this widespread uncertainty will continue to roil the markets.

The ensuing uncertainty still works in your favor, though:
It is a good time to add to your portfolio durable stocks that
will do well no matter who is in power next year.

CHICAGO (Reuters) – If there’s another round of stimulus from the Federal Reserve, as has been telegraphed by Ben Bernanke, it may end up sounding like an alarm clock that barely rings. It will be heard, but it may not be enough to rouse a drowsy U.S. economy.

The Fed’s previous bond-buying sprees – which pumped more than $2 trillion into the U.S. economy and kept interest rates near zero – put a fire under stocks as investors moved from poor-yielding bonds.

But will more bond buying morph into a fall rally? It depends on whether the economy responds. That would mean improvement in job growth, housing prices and general economic activity.

For those cheerleading the American recovery, though, it was disheartening when the Institute for Supply Management reported that U.S. manufacturing retreated in August at its sharpest rate in more than three years. That was despite automakers having their best August since before the 2008 meltdown.

Market analysts are also watching with concern as economic growth slows in China.

There is a crisis mentality keeping interest rates low and anxiety high, even as the European debt picture brightens somewhat. With the combined malaise of the euro zone and paltry U.S. economic and job growth, any quantitative easing by the Fed will seem like a desperate move to re-invigorate the American economy.

As Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock told me: “Near-term alleviation of euro zone breakup fears through European Central Bank policy intervention may help stem the fear premium embedded in interest rates. With interest rates at historic lows and many European short-end government bond markets at zero or even negative nominal yields, odds are skewed toward modestly higher interest rates.”

The current skittish economic picture reminds me of the perennial Peanuts cartoon in which Charlie Brown’s erstwhile friend Lucy gets Charlie excited about kicking a football, offers to hold it and then pulls the ball away at the last moment. There are many pundits who want to get jazzed about a U.S. economic rebound, but then some development in Europe or Washington thwarts that enthusiasm. Good grief.

How do you invest in this Charlie Brown economy? Here are three strategies that will move you away from the headlines and better position you long term:

1. Make a crisis hedge.

I’m still not convinced that anyone should hold most of their portfolio in commodities because they don’t pay dividends and typically don’t represent earnings derived from corporate profits. Yet a case can be made for their haven-like qualities from dollar-based fears. The largest gold-owning exchange traded fund, the SPDR Gold Trust, is still a good vehicle for the yellow metal.

If you want more metals, the iShares Silver Trust is a consideration. For overall commodities indexing – covering everything from agricultural goods to metals – consider the PowerShares DB Commodity Index Tracking Fund. The ETF tracks crude oil, gasoline, copper, soybeans and several other commodities. Just keep in mind that commodities in general are highly volatile; they should represent no more than 10 percent of your portfolio. Also, bear in mind that if a global slowdown continues, they will certainly lose value.

2. Target U.S. stock sectors.

Let’s say that the Fed stimulus – or other animal spirits – actually succeeds in jump-starting the economy. American consumers then return to retail stores and restaurants and start traveling again. That’s a big boost to consumer discretionary and durable goods. ETFs such as the Consumer Discretionary SPDR and Vanguard Consumer Discretionary funds hold companies that will benefit. Long-term, it still makes sense to bet on a rebound and stocks are the place to be when the turnaround takes hold.

3. Take a broad-based approach.

This is always my preferred mode rather than making specialized bets on sectors. The iShares Dow Jones Total U.S. Market Index fund, holds 95 percent of the American stock market. Funds like this should be a core holding because they cover so much of the market at so little cost.

At the very least, uncertainty risk should remain high in coming months as the markets juggle news from the United States, China and Europe. Those who are hedging against further devaluation of the dollar or euro should be prepared if the trend reverses. The bottom line is to know what your portfolio gut factor is: How much can you not afford to lose if the Fed fails?

(Follow us @ReutersMoney or here)

(Editing by Beth Pinsker Gladstone and Dan Grebler)

CHICAGO (Reuters) – There is a nagging question to consider before you jump into home-buying after one of the worst housing slumps in American history. Will you ever make money? Based on how the market has performed in the past, there is no clear answer.

Not that there hasn’t been good news about home prices lately. Prices have rebounded in most of the largest U.S. cities over the last five months. The closely watched S&P Case-Shiller home-price index rose 0.9 percent in July on a seasonally adjusted basis.

Low interest rates provide an added bonus: With mortgage rates still at generational lows – 30-year loans still average well under 4 percent – it’s a good time to lock in a bargain.

Residential housing is still a buyer’s market, and it will be for some time. There was an inventory of 2.4 million unsold homes as of July, according to the National Association of Realtors. That is roughly a 6-month supply, based on current sales trends.

But such statistics don’t provide a basis for determining whether buying a home will be a money-making proposition.

Housing prices have a history of following demographic trends. When veterans came back from World War Two, for example, they wanted homes that would accommodate their growing families. When their children — the Baby Boomers — became home buyers, they fueled the market from the late 1970s through 2006.

Historically, the two greatest surges in home prices over the past century occurred between the end of World War Two and the mid-1950s and from 1999 to 2006. When there are large numbers of home buyers of child-bearing age, that seems to correlate highly with home sales.

The last run-up in prices was the largest, according to data collected by Yale Professor Robert Shiller, author of “Irrational Exuberance” and co-creator of the Case-Shiller housing indexes. A rush to real estate combined with Baby Boomer liquidity, distrust of the stock market and a bubble mentality to drove that mania.

Homeowners got smaller price bumps during the inflationary late 1970s up until 1980, and increases remained moderate until 2000, when home prices went on a bubble-fueled tear, according to Shiller’s historical data.

Is history any guide to the future performance of housing? In one respect, yes. If the Millennial generation, born after 1980, jumps into the market en masse as their parents did, then they will bid up prices. However, that assumes they can afford to buy homes. High unemployment and wage levels that have not been keeping pace with inflation for the past decade suggest that many would-be home buyers will remain renters.

The idea that home prices will always track the rate of inflation is not always true when it comes to specific neighborhoods or regions. It is a myth that home prices consistently rise.

I took a look at my own home in the suburbs of Chicago, which we had built in 1999. If it had kept pace with inflation, it would be worth $433,000 today. For this rough calculation, I used the U.S. Bureau of Labor Statistics Consumer Price Index inflation calculator.

After I ran the CPI calculator estimate, I discovered that my home is probably worth – based on current market value – at least $183,000 less than what 14 years of consumer price inflation would have dictated.

The housing meltdown and subsequent foreclosures have depressed housing prices by up to 50 percent in some areas. Places like Stockton, California, which recently filed for bankruptcy, have been devastated. Atlanta is also still reeling. Florida, Arizona, Nevada and parts of California are still feeling the effects of the housing crash.

What does this mean if you want to jump back into the housing market? You may get a bargain, but don’t expect to see the appreciation the country has experienced in the past. Housing is not like the stock market in that it could take many years, or even decades, to bounce back.

Keep in mind that this housing recession is unpredictable because it is unusual for its duration and intensity. Two national housing downturns in the 1990s (1990-91 and 1994-95) were accompanied by relatively small recessions and recoveries within a year or so.

Since the U.S. is linked to a global economy teaming with uncertainty and a banking system that still hasn’t resolved its pre-2008 issues, homes are worthwhile shelters, but they still may be dubious investments.

(Editing by Linda Stern, Heather Struck and Steve Orlofsky)

CHICAGO, Sept 5 (Reuters) – Let’s say, after recent fee
disclosures from retirement funds, that you have discovered that
your 401(k) is a rusting beater of a plan. It’s expensive to
maintain, non-diversified and has performed poorly over the last
10 years.

You may have to do some internal lobbying to change your
plan. Yet if you can enlist the support of fellow employees,
managers and executives by explaining how poor returns eat into
their retirement lifestyles, you might gain some traction.
Changes are possible, even when employers are reluctant to do
anything.

Consider the idea of placing company stock in 401(k) plans,
an idea that became toxic after the Enron-WorldCom debacles. The
percentage of companies engaging in this practice has dropped to
under 10 percent, down from 11 percent in 2009, according to
BrightScope, a San Diego-based service that tracks retirement
plans.

Once you convince your employer to shop for another plan,
you need some decent, “best-in-show” plans to emulate. In
keeping with my “benchmark and balance” strategy, (link here)
these may be funds that are relatively low cost and that track
most of the important asset classes: U.S. stocks/bonds,
international stocks/bonds, real estate investment trusts
(REITs), commodities and inflation-protected securities (TIPS).

A reasonable model would be the University of Pennsylvania’s
Basic Plan. Featuring Vanguard funds, its offerings cover five
major asset classes and more than 40 minor ones, according to
John Zhong of MyPlanIQ, a service that lists and rates 401(k)
and other portfolios. “Many university deferred or 403(b) plans
have low-cost Vanguard funds,” Zhong said. “They are usually
pretty complete.” (Disclosure: most of my 401(k) is in Vanguard
funds).

What’s inside Penn’s plan that I like? You can cherry-pick a
number of funds such as the Balanced Index (VBINX) for a
moderate risk level or invest in emerging market stocks (VEIEX)
or REITs (VGSIX).

The Penn plan is notable for its flexibility. If you don’t
want to choose individual funds, you can go with the all-in-one
target date funds, which shift allocations to lower stock-market
risk as you get older.

Although I’d prefer to see even lower-cost, exchange-traded
funds, many of the Vanguard funds employ the passive index
approach to sample asset classes. If you choose to adopt a
“strategic moderate” allocation and rebalance on a regular
basis, you would see a five percent year-to-date return through
August 31, according to MyPlanIQ.

From an employer’s perspective, offering a large number of
funds is desirable – no one can say you didn’t provide ample
diversification opportunities – but sometimes the sheer number
of funds is daunting. The average plan offers 22 funds,
according to Aon Hewitt, a benefits consulting firm. When faced
with too many choices, a lot of us become paralyzed with
indecision and make bad choices.

The Google 401(k) is another “best-in-show” plan. You can
broadly diversify with the Total International Stock Index
(VGTSX) or invest in a conservative income fund like the
Vanguard Wellesley Income fund (VWINX). A strategic, rebalanced
portfolio reaped an 8.7 percent return this year through August
31. (Note: As with all of the plans I cite, I haven’t mentioned
all of the funds within them and many may have changed their
offerings.)

For an even more streamlined – and lower-cost – approach, I
like the simplicity of the Sharebuilder 401(k), which uses all
exchange-traded funds (ETFs). The plan offers funds covering
commodities, TIPS, stocks, bonds and REITs. There are even
emerging markets bonds through the PowerShares Emerging Markets
Sovereign Debt fund (PCY). The portfolio’s three-year strategic
return has been just under 10 percent.

What is essential for any high-quality 401(k) is something
that’s often missing from the mix: Personalized advice. You can
find this if you have spent any time on a major mutual fund
website, where you can find allocation tools that will help you
decide which funds to choose and the right percentage of each.
Play around with them a bit, inserting your age, risk tolerance
(aggressive, moderate, or conservative) and goals (income,
growth).

Keep in mind that you’ll need some basic education before
you even make a decision on how to allocate. Have you considered
emerging-markets stocks for global growth? Do you have
inflation-protected bonds if most of your portfolio is
income-oriented? Have you considered commodities and REITs,
which may not move in lockstep with stocks?

It is helpful to know the reason for owning each fund and
how it fits into your overall plan. Write down an investment
policy statement that includes your objectives and percentage
allocation to each asset class. For a moderate investor, a
worthwhile mix would be 60 percent stocks, diversified across
U.S. and emerging/developed markets with the remainder in U.S.
bonds, emerging markets, commodities, REITs and TIPS.

What if your plan already looks like one of the models I’ve
suggested? Then you can fine tune it by seeing where the gaps
are. When I overhauled my retirement portfolio recently, I
discovered that a commodity fund I held did worse than most of
my stock funds in 2008. That wasn’t supposed to happen, so I got
rid of it and found an inflation-protected securities fund
instead – the Vanguard TIPS fund (VIPSX). I plan to add a
diversified commodities fund later this month.

When you come up with an allocation, you can do something
that the industry calls a back-test. How did it perform over the
last five years, which includes 2008? Most fund websites will
also provide some tools that will tell you how certain
allocations have performed. Yet, they are ballpark averages. You
will need to look at individual fund returns to get a better
idea.

To do this right, your model portfolios should serve as a
guide, but you may need to change your mind set. Assembling a
good mix doesn’t mean picking all of the best-performing funds
of the last year or so. That will lead you astray, since hot
performers rarely repeat.

Focus on getting the best returns across all asset classes
through index funds with the least amount of total risk.
Professional advisers spend a lot of time and energy trying to
do this, and they often don’t get it right, so don’t feel
discouraged. Find some durable models and see if they work for
you. They may not look elegant, but they should serve you well
over the long run.

(Editing by Heather Struck, Lauren Young and Leslie Gevirtz)

CHICAGO, August 2 (Reuters) – Most experienced long-term
investors know stocks are volatile and can deal with it. But
what if you want to stay in stocks and at the same time reduce
your downside risk and avoid a cyclonic year like 2008?

You might be tempted by funds that bill themselves in a “low
volatility” category, though “volatility” is a red herring. A
“low-beta” approach might be better.

Beta is a measure that portfolio managers use to determine a
portfolio’s sensitivity to a major index. A perfect match with
the index is 1.00, and stocks are measured in a percentage
against it. The lower the beta, the less a portfolio tracks a
market average, such as the S&P 500 index.

From 1926-2011, according to Ibbotson Associates,
large-company stocks had a standard-deviation of about 20
percent. Small-company stocks were much more volatile over that
period: 32 percent. When you look at long-term government bonds,
though, volatility drops to 9.8 percent, and with a portfolio of
U.S. Treasury bills, it drops to 3.1 percent.

Keep in mind that I’m referring to historical volatility;
flash crashes and technical glitches such as the one that
occurred on We dnesday with Knight Capital are another
matter. Volatility is often unpredictable in a market
increasingly dominated by high-frequency robotic trading, which
often amps up market movements.

RISK VS. REWARD

Most investors can take some risk – 20 percent doesn’t sound
like much to most seasoned long-term investors – in exchange for
beating inflation and building a decent retirement portfolio.
The question then is what funds to choose.

You can be easily befuddled, since a wave of new funds
emerged over the past year touting low-volatility, high-dividend
stocks and lower market risk. The “low-vol” funds tend to
conceptually overlap with equity-income, high-dividend and
balanced offerings, which are categories of funds that have been
around for years. So it’s a bit of a marketing gimmick to claim
that the new class of funds is any less risky than the
stalwarts.

The “low volatility” moniker, especially, loses some of its
punch when global market downturns happen. In those cases, since
every market is reacting to what’s going on in Europe,
Washington and Beijing simultaneously, volatility can bruise any
stock portfolio at any time. Having a portfolio of
dividend-paying stocks is better than non-dividend payers, but
it often skirts the fact that stocks are still much more
volatile than bonds.

Low-volatility funds typically are portfolios composed of
mature companies that pay consistent dividends. They are often
in established industries such as utilities, healthcare,
consumer staples and durable goods. You won’t find many
high-flying technology stocks in this pack.

When you look at popular, low-volatility offerings, though,
they may reflect high correlations to the overall market. The
PowerShares S&P 500 Low Volatility Portfolio ETF, for
example, has a beta of 0.66, which means it’s less volatile, but
moves closely with the market average for large stocks, with a
correlation of 0.95 (through June 30).

THE BETA DIFFERENCE

A new, emerging class of low-beta stocks does not entirely
eliminate market risk – no stock fund will – but is less likely
to move in lock step with the S&P 500 when it declines. The
Russell 1000 Low-Beta ETF, for example, has a beta of
0.71, which means it’s more than one-quarter less volatile than
the Russell 3000 Index. The fund tracks an index of large-cap,
low-beta stocks.

But sometimes, fund names don’t always tell you the whole
story on market risk. The Vanguard Dividend Appreciation ETF
, with a 0.82 beta, focuses on “achievers” that have
raised their dividends for at least 10 straight years.

While this is one of the lowest-risk funds in its category,
it’s not immune to downturns. In 2008, it lost about 27 percent,
compared with a 37 percent loss for the S&P 500. The Guggenheim
Defensive Equity Fund has an even lower beta – 0.57 -
but lost 30 percent in 2008.

No matter what it’s called, any stock fund will move with
the overall market in some way. There are also other gauges that
are better at measuring overall risk, such as the Sortino Ratio,
which distinguishes between upside and downside volatility. So
if you really want some idea on how a fund might perform in a
swoon, you’ll need to do some more homework.

If risk measurement is still a muddle to you, look at assets
that are usually uncorrelated to stock movements, such as money
market funds, U.S. bonds, metals and commercial real estate.
Commodities also may be in that camp, but like Real Estate
Investment Trusts, they traveled the same road south as stocks
in 2008.

Want to keep it simple? Boost your bond mix while reducing
stock holdings in line with what kinds of losses you can
stomach. While fund names can often be confusing, straight
allocations are pretty good barometers of how much stock-market
risk you’re taking.

CHICAGO, July 30 (Reuters) – I have a pretty good idea of
what drought looks like after recently traveling more than 1,400
miles from Chicago to Utah: Vast patches of brown where there
should be green. Cornstalks that look like desiccated
scarecrows. Wilted soybeans. Forested Colorado canyons
devastated by wildfires and pine beetles.

Whether this is the brutal impact of climate change or a
short-term cycle, I can’t say. Regardless of your scientific or
political persuasion, though, what is certain is that water is
going to be an increasingly valuable commodity and a worthwhile
long-term investment.

The short-term nightmare is that the United States is
experiencing its hottest year on record. States from Ohio to
California — 53 percent of the contiguous United States — are
in drought, according to the National Weather Service. Many
breadbasket states that have traditionally been blessed with
summer rains in the Midwest are parched.

As a result, 45 percent of the corn crop and 35 percent of
soybeans are rated “poor to very poor,” according to the U.S.
Department of Agriculture. The produce manager at my local
supermarket heard that farmers are close to plowing under their
fields and seeking crop-insurance payments as drought is
expected to intensify across America’s heartland. More than
1,200 counties have been declared disaster areas. Futures prices
on corn have already hit a record high.

As a result, look for higher prices on everything from bread
to steaks.

WIDESPREAD DISASTER

Globally, the long-term picture is worse. Rising water
demand due to population increases, industrialization and higher
standards of living in developing countries is exceeding supply.

According to the United Nations (UNESCO), not only is water
being wasted around the world, the infrastructure for producing
and recycling it lags the demand. Nearly 1 billion people do not
have access to clean water while another 3 billion are expected
to join the world’s population in the next 40 years. China alone
is planning to add some 500 new cities, each housing 100,000 or
more people. Also consider the big industries that are major
water consumers: electric power, metals, petroleum and food
production. Some 70 percent of all fresh water is used by
agriculture.

Where will the water come from to quench the thirst and feed
some 10 billion souls? The ocean is one answer, since it covers
most of the planet as freshwater sources are being rapidly
depleted. Yet that calls for quantum leaps in technology since
desalination requires tremendous amounts of energy to take the
salt out of seawater. Currently there are more than 7,500
desalination plants in use globally — a number that is
expected to double by 2025, estimates the United Nations.

Conservation and treatment technologies are also a partial
answer, which means better filtration, conservation and
water-treatment systems — infrastructure that costs trillions.
If growing countries are committed to supporting their
burgeoning populations, they will need to make these
investments.

A handful of global conglomerates already have these
concerns in their sights. General Electric Co, for
example, has a water and process technologies unit. Dow Chemical
Co, Siemens AG and DuPont also have
water-treatment units.

If you are looking for more specialized leaders in the water
industry, consider Modern Water Plc, which has pioneered
a new “forward osmosis” desalination technology, or the Korean
company Doosan Heavy Industries, which makes water
treatment and desalination systems. The French company Veolia
Environnement VE SA provides drinking and wastewater
services.

More diversified baskets of water-related companies can be
found in exchange-traded funds (ETFs), which are the preferred
approach for most investors. PowerShares Water Resources ETF
invests in an index of water companies as does the
Guggenheim S&P Global Water Index.

Water has often been called the new gold or oil. That is
not an appropriate comparison, though, because our bodies are
mostly water and we cannot live without it. Still, water demand
will create new business and technological challenges to
produce, store and recycle it. Conservation will become even
more important to protect run-off and topsoil. Agricultural
productivity will also need to improve. We will probably see
even more “vertical farms” that employ skyscrapers and solar
power to grow food in cities.

What is needed is something akin to the “green revolution”
that took place in the mid-20th century that vastly boosted
agricultural productivity. A new “blue” revolution will employ
more efficient use of water resources and re-use water so that
billions may thrive. It will take a universal global commitment
that will reshape everything from soft-drink manufacturing to
taking a shower. It is long overdue and an essential technology
investment. After all, you can’t drink a smartphone or
flat-screen TV.

CHICAGO (Reuters) – Do you have a lingering memory of motion sickness after last summer’s debt storm? I do.

Before another cyclone hits, it’s a good time to check your portfolio mix of stocks and bonds as a way of securing your financial ship.

A sensible portfolio review deals with your fears first.

What will be most harmful to your standard of living if your portfolio comes up short? Have you taken a look at how your portfolio performs in the worst markets?

If there’s another summer swoon for global stocks, now’s the time to ask these questions. Here are five suggestions:

1. Reduce tail risk.

Forget about daily ups and downs, which can be irrelevant. Tail risk — or the probability of an extreme event such as a 2008-style meltdown — is a storm tide for your portfolio.

You don’t want to be mostly in stocks before you retire and then face a 2008-style tanking. Last summer was bad enough. You certainly don’t want that kind of volatility if you need to preserve what you have.

Managing risk is a matter of balance. Ratchet down stock market exposure and your potential to lose money drops. While you may get the highest possible returns with stocks, your exposure to the extreme tails is lower if you add bonds.

Also keep in mind that you only get the “average” return if you hold your allocation for a long time. Most people jump in and out when they get spooked, so their performance is much lower.

2. Benchmark.

If you have an all U.S. large-company stock portfolio, how did it compare to the S&P 500 Index? The index is up 7.6 percent through July 25, when you include dividends. Did your stock funds do at least as well as that?

If you hold U.S. bonds, use the Barclays Capital Aggregate Bond Index or the iShares exchange-traded fund (ETF) that tracks the index as a proxy. The fund currently has about a 2.5 percent yield (I hold it in my 401k).

Now that the U.S. Labor Department will start to require employers to tell you how much your retirement funds cost, you can easily see if you’re being charged too much.

Because fund managers charge expenses, you will never get the return of the index. But the more you lag the index return, the more you should be reducing management expenses — especially in your 401(k) funds.

If you are trailing the index by more than 0.25 percent, then transfer into low-cost ETFs or index mutual funds. Every bit of extra return goes into your pocket.

3. Revisit your investment policy statement.

First of all, do you even have one? This is a stated list of goals for your portfolio. Do you want to retire early? Save for college? Keep on working and live off the interest?

Write it down and check your progress. You should state how much you want to invest in stocks, bonds and alternatives to reach your goal with the amount of risk that will allow you to sleep at night.

4. Rebalance.

As part of your investment policy statement, your mix should reflect what you want to achieve. But with stocks or bonds moving with the market, your percentage in each asset class will shift. In order to keep to your goals, rebalance by selling winners and reinvesting to get back to your ideal mix.

This also allows you to buy low and sell high to take advantage of market dips. I know this sounds counterintuitive, but it will keep you on track.

5. Be Flexible.

Things change. You may have gotten divorced. Maybe your children moved back in after college because they couldn’t find a job. You may have to care for an aging parent. Make sure your portfolio plan can accommodate life changes.

When it comes to a sound portfolio review, keep in mind that it’s not all about return. You need to project how much money you will need in the future to sustain a comfortable lifestyle, however you define that. Risk should be foremost on your mind now, even if you have plenty of time to invest.

And while inflation isn’t quite a problem now, you should protect your bond holdings from rising interest rates with inflation-protected securities or bonds you hold to maturity.

If you need help, most large mutual fund companies, banks and brokerage firms can help with portfolio reviews and rebalancing. Some even offer certified financial planners to aid in the process.

If your needs are more complex, seek the guidance of a registered investment adviser or chartered financial analyst. But don’t get into a situation where you feel obligated to buy commissioned products. Keep your costs low and objectives in clear view.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Follow us @ReutersMoney or here. Editing by Beth Pinsker Gladstone and Jeffrey Benkoe)

CHICAGO, July 24 (Reuters) – While there’s some debate over
whether the U.S. residential market is in recovery mode, there’s
a stronger case for a rebound in commercial properties.

Real Estate Investment Trusts (REITs), which invest in a
variety of income properties and mortgages and are listed on
stock exchanges, often serve as a bellwether of consumer and
commercial economic activity, as they will show earnings growth
in a general recovery.

Aside from the economic recovery narrative, REITs make sense
for investors who are hunting for yield. Although REITs often
march in lockstep with stocks during recessions, they can move
in different cycles, dictated by movements in commercial real
estate. REIT managers also are able to buy more properties when
interest rates are low.

REIT exchange traded funds have recovered smartly over the
past three years. The S&P Global REIT index, which includes
properties from developed and emerging markets, was up 12.56
percent year-to-date through July 23. That compares to 8.67
percent total return for the S&P 500 stock index during the same
period.

That lends credence to the theory that the U.S. and
developed countries are slowly limping toward an upturn – at
least in property markets. A stronger economy and job market
translates into more people shopping, renting, traveling and
moving – and storing their stuff.

A large portion of the residential gains may be due to
increased building of apartment buildings as more people have
decided to rent rather than own. Increased commercial building
doesn’t precisely track general economic activity, but it may
indicate that investors are more confident. And increased travel
activity helps the hospitality industry.

HOW TO INVEST

There’s a range of exchange-traded or mutual funds that
invest in real estate stocks and REITs. For instance, some REITs
specialize in just shopping malls and retail outlets. But while
you can find a REIT that specializes in any property sector from
apartment buildings to health care, I recommend portfolios that
invest in a variety of properties.

Diversified REIT ETFs can give you a sampling of real estate
from across the world. The SPDR DJ International Real Estate ETF
, with a 4 percent yield, invests globally. The First
Trust S&P REIT Index concentrates on U.S. properties.
Still skittish about the American market? Then consider the
Vanguard Global ex-U.S. Real Estate ETF that invests
globally and avoids the American market.

REITs must distribute nearly all of their taxable income to
shareholders. They are traded as stocks on exchanges, but hold
multiple properties in their portfolios. Some are highly
diversified while others may focus on a specific sector such as
warehouses or office buildings.

For income investors, REITs offer higher yields. The yield
on the Vanguard REIT ETF was 3.25 percent, for example.
In contrast, the US 10-year Treasury note has been yielding
under 1.5 percent lately.

A note of caution: REITs are no substitute for bonds that
you hold to maturity. Their returns are not guaranteed and they
can be just as volatile as stocks. They declined in 2008 and
early 2009. If the recovery scenario does not play out, they
could drop in value again.

Be particularly careful with non-listed or “private” REITs,
which are typically sold through brokers and contain high fees.
Regulators have been scrutinizing them over the past year. I
recommend avoiding them unless you have them fully vetted by an
independent adviser such as a certified financial planner,
accountant or chartered financial analyst.

One more wrinkle: Lately the U.S. bond market has been
reflecting the possibility of another economic slowdown and euro
zone angst – 10-year yields are still near all-time lows – so be
careful. REITs are best for long-term investors who plan to hold
them. They should comprise no more than 10 percent of your
income portfolio. Property cycles can be just as fickle as
general stock market movements and take many years to play out.