James, of James Advantage Funds recommends having at least half of your assets in high quality bonds such as municipal bonds, specifically insured municipal bonds as these have higher yields than U.S. Treasuries.
He adds investors may want to consider municipal bond closed-end funds, as many are very cheap, selling at a discount to their net asset value, NAV (complete financial glossary), while still providing high quality.
James also says some investors may want to look at longer-term Treasurys, as “they have been a nice safety net” for investors and can provide a way to make money. Year to date they are up about 5% with market down double digits, he said.
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However, Alan Gayle, senior investment strategist for RidgeWorth Investments is more skeptical on U.S. Treasurys, saying that may be “the quintessential quality asset” but yields are very low.
In fact, current returns, he said, are lower than the rate of inflation, which means they are unlikely to meet very many investors’ objectives.
Gayle says investors who want something with less risk but potentially better returns might want to consider international bonds that are dollar hedged. Also, he believes there could be some good opportunities with high-quality, credit-related bonds.
Genworth’s Knepp says that in these volatile times, he employs a combination of fixed-income strategies, remaining conservative in terms of credit quality and duration, either fairly low or ultra short duration.
Some funds that Knepp likes for this type of exposure include the Federated UltraShort Bond Fund , as well as the PIMCO Low Duration Bond Fund, because they both have fairly healthy yields primarily invested in government investment grade bonds.
Picky About Stocks
While increasing your bond exposure could help lessen risk in your portfolio, it is still essential for investors to have exposure to equities. Genworth’s Knepp says investors looking to tweak their equity exposure in favor of less risky investments tend to flock toward value stocks.
This category, however, has historically included hefty exposure to financials, which have been severely damaged and, in Knepp's opinion, are not out of the woods yet.
According to James, one group that investors may want to consider are small cap stocks, which are currently cheaper that the S&P 500, and a group he expects to benefit from the strengthening dollar.
If you’re looking for safer sectors, one group to consider is consumer staples that perform well despite market downturns. This would include companies such as Wal-Mart Stores and BJ’s Wholesale Club, which will continue to see customers in tough times because of their discount prices.
In addition, utilities often have good yields and should benefit from falling energy prices.
According to Gayle, these periods of market stress and turmoil are a good opportunity for investors to revisit their appetite for risk and make small modifications accordingly. However, he adds investors should avoid making major changes to their portfolio based simply on short-term changes in the market.