As we come to terms with the new concerns of double-dip recession, eurozone debt and continued wild swings in the market, the pundits are coming up with stocks you can buy to make the most of these difficult times. It's clear that the appetite for returns has been replaced with a desire for lower risk alternatives.
Jim Royal outlines his approach and selections assuming that unemployment will continue to be a challenge and world economies see sluggish growth.
In a nutshell, his approach is to get good long-term values which you buy when there's uncertainty. He then outlines his choices that should do well in conditions we are anticipating over the next couple of years.
His selections are:
Company | Market cap | P/E | Yield |
|---|---|---|---|
| National Grid (NYSE: NGG) | $33.8 billion | 9.4 | 6% |
| AT&T (NYSE: T) | $174.9 billion | 8.9 | 5.9% |
| Telefonica (NYSE: TEF) | $98.0 billion | 7.4 | 10.6% |
| BP (NYSE: BP) | $141.3 billion | 7.1 | 3.9% |
| Annaly Capital (NYSE: NLY) | $16.6 billion | 6.7 | 15.5% |
Source: Capital IQ, a division of Standard & Poor's.
The National Grid operates power and gas transmission systems in the U.S. and U.K. It operates like a toll road, earning money whenever gas or electricity move across its transmission network. Its hard assets are absolutely vital, and they help backstop the stock's valuation.
AT&T and Telefonica are heavyweight telecommunications companies and our appetite for phone services continues unabated.
Oil companies will continue to do well and BP is cheap because of the recent Gulf of Mexico disaster but there are others.
Annaly Capital gives access to U.S. real estate which should provide stability given that we have learned our mortgage lessons and this has been priced into the market.
This is an intriguing mix with domestic and international exposure as well as real estate and a leaning towards commodities with BP.
We entered these funds into our system and then compared it with a balanced portfolio of Dividend producing ETFs.
| Asset | Fund in this portfolio |
|---|---|
| REAL ESTATE | ICF (iShares Cohen & Steers Realty Majors) |
| CASH | CASH |
| FIXED INCOME | TIP (iShares Barclays TIPS Bond) |
| Emerging Market | VWO (Vanguard Emerging Markets Stock ETF) |
| US EQUITY | DVY (iShares Dow Jones Select Dividend Index) |
| US EQUITY | VIG (Vanguard Dividend Appreciation ETF) |
| INTERNATIONAL EQUITY | IDV (iShares Dow Jones Intl Select Div Idx) |
| High Yield Bond | HYG (iShares iBoxx $ High Yield Corporate Bd) |
| INTERNATIONAL BONDS | EMB (iShares JPMorgan USD Emerg Markets Bond) |
- 5 Stocks You Need for a Balanced-Budget World -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
| Portfolio/Fund Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| Retirement Income ETFs Tactical Asset Allocation Moderate | 7% | 81% | 10% | 88% | 10% | 71% |
| 5 Stocks You Need for a Balanced-Budget World | 10% | 58% | 4% | 13% | 6% | 19% |
| Retirement Income ETFs Strategic Asset Allocation Moderate | 7% | 67% | 4% | 17% | 3% | 16% |
This set of equities have done a decent job but the Sharpe index is a little high -- there are selections we have picked that have had better properties (and many that are worse).
The more detailed analysis and graphs show the volatility of the stock portfolio which has performed reasonably well but with more volatility.
Reviewing the graphs, I prefer the returns and lower volatility of the ETF portfolio -- perhaps picking a couple of equities per segment would smooth out some of the volatility.
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
