We have previously remarked that the appetite for returns with associated risk has rapidly evaporated and has been replaced by a much more conservative "batten down the hatches and ride it out" mentality. Brian Stoffel of the Motley Fool suggests that now is not the time to stick your cash under a mattress, but comes up with his top five defensive picks.
There is an increasing emphasis on blue chip dividend earners that should be less impacted by the downturn (note less impacted, not untouched). We are going to compare them with our portfolio of ETFs that have a bias towards dividends, providing very broad diversification but with a focus on income.
- PepsiCo, Inc. (NYSE:PEP)
- Philip Morris (NYSE:PM)
- Abbott Laboratories (NYSE:ABT)
- Johnson & Johnson (NYSE:JNJ)
- Altria Group, Inc. (NYSE:MO)
|Asset||Fund in this portfolio|
|REAL ESTATE||ICF - iShares Cohen & Steers Realty Majors|
|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 Top Defensive Stock Picks for an Uncertain Market -- 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 Performance Comparison Holdings (09/06/2011)
The first thing to note is that the portfolio is reasonably well balanced. Philip Morris and the Altria group are heading the list, but all of the equities are well represented.
|1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||7%||75%||11%||88%||10%||71%|
|5 Top Defensive Stock Picks for an Uncertain Market||15%||121%||6%||31%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||7%||59%||5%||22%||4%||16%|
The history is limited, but we can see that it performs reasonably well compared with the buy-and-hold ETF portfolio, and you have a solid set of equities. Note, however, that it doesn't perform as well as the ETF portfolio with tactical asset allocation. Of course, this isn't a true apples-to-apples comparison, as the five equities would only be part of a portfolio.
Three-Month Chart One-Year ChartThree-Year ChartFive-Year Chart
The more detailed analysis and graphs give you a visual view of the volatility.
When you select more conservative, long-term players, you see reduced returns but with reduced volatility. However, you are making a bet that the companies do well against their peer group, as well as the sector surviving. For those wanting to minimize risk and cost, ETFs have to be a good choice. The dividend ETF portfolio looks good against this selection.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional 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.