It's one of the golden rules of investing: Make a plan and stick with it. But when share prices head south (the risk of which increases as the bull market continues to age), many investors find it difficult to follow the prime directive. They panic and chuck their stocks at precisely the wrong time, when prices are down. One excellent defense against such boneheaded behavior: Cushion your portfolio against shocks with funds that keep you on track but offer a steadier ride. We have nine funds that can help you do just that.
Balanced Funds
One of the easiest ways to cut risk is to trim your portfolio's allocation to stocks. Most investors should have been doing that in recent years when they rebalanced their portfolios; in most years, that meant selling stocks, which performed well, and moving the proceeds into bonds, which did okay but not as well as stocks. But rebalancing isn't always as simple as it seems to be. "Not only does it take time, but it also takes strong conviction to sell stocks when prices are rising, as they are today," says
NEXT: Our picks for steady balanced funds
Vanguard Balanced Index
1-Year Return: 9.7%
3-Year Return: 10.9%
5-Year Return: 10.4%
Expense Ratio: 0.23%
Vanguard Balanced Index (symbol VBINX) has a consistent record of above-average returns with below-average volatility. The fund keeps its mix steady: 60% in stocks and 40% in bonds. It does not invest in other Vanguard index funds. Rather, it directly holds stocks (3,354, at last report) and bonds (6,012) in an attempt to capture the performance of indexes that track the entire U.S. stock and bond markets. Over the past five years, the fund has been 14% less volatile than the typical balanced fund and 40% less jittery than Standard & Poor's 500-stock index.
Fidelity Balanced
1-Year Return: 11.4%
3-Year Return: 12.4%
5-Year Return: 11.1%
Expense Ratio: 0.56%
Fidelity Balanced (FBALX), which is actively managed, has been slightly more volatile than Vanguard Balanced and has delivered slightly greater gains. Not surprisingly, the Fidelity fund holds more in stocks--nearly 70% of assets at last report.
Funds for Limiting the Ups and Downs
What if you could own stocks but suffer fewer of the market's bumps? That's the idea behind low-volatility exchange-traded funds, which typically home in on the steadiest stocks within a particular index. You give up some return--but, it turns out, not a lot.
NEXT: Our picks for funds that minimize volatility
PowerShares S&P 500 Low Volatility
1-Year Return: 10.9%
3-Year Return: 14.4%
5-Year Return: --
Expense Ratio: 0.25%
Since PowerShares S&P 500 Low Volatility (SPLV) launched in
iShares MSCI Minimum Volatility Funds
A low-volatility strategy has worked even better overseas in recent years. For example, iShares MSCI EAFE Minimum Volatility (EFAV) and iShares MSCI Emerging Markets Minimum Volatility (EEMV) track subsets of indexes for developed foreign markets and emerging markets, respectively. Over the past three years, each fund has been 21% less volatile than the affiliated conventional index, but each has beaten its benchmark. The EAFE low-volatility fund edged the MSCI EAFE index by an average of 0.3 percentage point a year, and the emerging-markets ETF beat the MSCI Emerging Markets index by 2.0 points per year.
iShares MSCI EAFE Minimum Volatility (developed foreign markets)
1-Year Return: 9.5%
3-Year Return: 12.0%
5-Year Return: --
Expense Ratio: 0.20%
iShares MSCI Emerging Markets Minimum Volatility
1-Year Return: 9.9%
3-Year Return: 5.3%
5-Year Return: --
Expense Ratio: 0.25%
Alternatives Funds
If you expect turbulent markets, you want "to own things that will not look or act or feel like stuff you already own," says
NEXT: Our picks for alternatives funds.
William Blair Macro Allocation
1-Year Return: 7.0%
3-Year Return: 9.6%
5-Year Return: --
Expense Ratio: 1.35%
William Blair Macro Allocation (WMCNX) is a better deal than most. The fund, which can invest in different kinds of assets all over the globe, charges 1.35% a year. The managers,
Merger Fund
1-Year Return: 1.9%
3-Year Return: 2.9%
5-Year Return: 2.8%
Expense Ratio: 1.23%
In truth, Merger's results have been underwhelming of late. Over the past five years, it returned 2.8% annualized. But it did so with 80% less volatility than the S&P 500. And performance should improve when interest rates rise. That's because a typical deal is structured to return between two and five percentage points more than the yield on the 10-year Treasury bond, says comanager
IQ Merger Arbitrage ETF
1-Year Return: 6.1%
3-Year Return: 4.3%
5-Year Return: 2.4%
Expense Ratio: 0.76%
If you prefer an indexed approach to deal investing, consider IQ Merger Arbitrage ETF (MNA). It tracks an index that currently holds 41 stocks targeted in mergers and buyouts. Over the past five years, it has experienced about 60% less volatility than the S&P 500. And with an annual expense ratio of 0.76%, it's about a half-percentage point cheaper than
IQ Hedge Multi-Strategy Tracker ETF
1-Year Return: 3.9%
3-Year Return: 4.1%
5-Year Return: 3.4%
Expense Ratio: 0.91%
Have you had a hankering to invest in hedge funds but been turned off by exorbitant fees and the occasional blowup? The next best thing may be IQ Hedge Multi-Strategy Tracker ETF (QAI), which seeks to track popular hedge-fund strategies by buying and selling short other ETFs. The 0.91% expense ratio is high for an ETF, but it's a lot less than the typical hedge-fund charge of 2% of assets annually and 20% of the profits. Over the past five years, IQ gained 3.4% annualized, but it did so with only 60% of the S&P 500's volatility.
Nellie S. Huang is Senior Associate Editor at Kiplinger's Personal Finance magazine.