4 ways to hedge the market without playing whack-a-mole

August 10, 2011

Is the recent market upheaval the growling of a new, prolonged bear market or a tempest in a teapot?

It’s too soon to tell and most of us will guess wrong anyway. As Washington and global traders sort out the impact of the U.S. “Tea Party debt downgrade,” you should employ the best hedging strategies possible.

Of course, if you already have a comprehensive financial plan with an investment policy statement in place — and it’s working for you — you’re probably fine. While the ongoing market angst is troubling, you’re still on course.

The only thing that’s guaranteed is that Euro Zone debt woes, the threat of a double-dip recession and ongoing U.S. budget battles will create more short-term volatility than a tropical storm.

Here are some ways of avoiding the market turmoil:

Build a can’t-stomach-stocks portfolio
There’s no shame in protecting your principal, particularly if you’re in or near retirement. The last decade was bad enough, and you shouldn’t have to suffer any more losses. If you can’t afford to lose anything, you shouldn’t be in stocks anyway. One way of dynamically measuring risks and avoiding market downturns is through tactical asset allocation.

The site MyPlanIQ provides some ways of customizing your portfolio to the kind of risk you can stomach. One simple, ultra-safe model they suggest combines just two income funds: The PIMCO Total Return fund and the Vanguard Short-Term Bond fund . About 67 percent of the plan is allocated to the PIMCO fund and 33 percent to Vanguard. While this portfolio doesn’t completely offset interest-rate risk, it’s a good place to be if stocks are tanking and there’s negligible inflation.

Go to safer international havens
Are there such safe harbors anymore in a global economy? Good places to start would be stable, AAA-rated countries like Austria, Australia, Canada, Denmark, Finland, Germany, Liechtenstein, Luxembourg, the Netherlands, Norway and Singapore. While none of these countries is immune from global financial woes, they are a long way from death watch.

Those countries blessed with natural resources give you a double play on the growth in worldwide commodity demand and currency diversification. Exchange-traded funds such as the iShares MSCI Australia Index fund and iShares MSCI Canada Index are worth considering. Want an easy way of buffering inflation? You can buy iBonds directly from the U.S. Treasury, which have returns indexed to a cost-of-living index.

Focus on American essentials
The prospect of a double-dip recession means going defensive in individual stocks. What do consumers do when they have to cut back and save money? Utilities (which pay decent dividends as well) and healthcare stocks typically hold up. Energy is another area that might provide some insulation. Worthy choices include the Utilities Select Sector SPDR ETF, the Vanguard Health Care ETF and Energy Select SPDR ETF.

Let frugality rule
Speaking of trimming the household budget, another retrenchment means people will want to save money any way they can. Priceline, the online travel discounter; Dollar General, the deep-discount retailer; and Netflix, the online movie/TV service, offer some ways to reduce expenses.

Still in the fog over how to deal with the market tumult? Think long term and don’t dart in and out of stocks or funds. Your overall strategy shouldn’t be a whack-a-mole game where you’re trying to avoid the latest market worry such as French banks or U.S. bonds.

Work with a certified financial planner to craft a tax-efficient plan that focuses on risk reduction and adequate retirement income. If your plan matches your comfort zone, you shouldn’t need to worry when national or global economic pots boil over.

4 comments

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Posted by vince7777 | Report as abusive

You call this journalism: “Tea Party debt downgrade.” How about you report the facts and leave the judging up to the readers. If congress would have done what the tea party wanted and actually cut our deficit (not just cut spending but the actual debt we owe) our debt wouldn’t have been downgraded.

Posted by AuditTheFed | Report as abusive

The Tea Party is inherently hostile to government and isn’t interested in governing. Moreover, they would slice up Medicare and Social Security, two of the most successful programs in our history. Should Congress be more serious about cutting government waste? Absolutely. But holding the country hostage over a debt ceiling increase doesn’t promote dialogue. Let’s have an open discussion of these issues and see what compromise can be attained. Inflexibility is not democracy.

Posted by johnwasik | Report as abusive

What inherent dribble. “Bond Funds?” Really?? And foreign ETFs?? Not to mention the Tea Party attack ad nauseum. Was Reuters’ editor on holiday when this was posted??

Posted by Russellista | Report as abusive

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