David Sterman has who has worked as an investment analyst for nearly two decades and now writes for Street Authority reflects on the increased risk exposure of some in their investments. As we continue to see the markets rise, he questions whether now is the time to consider what might happen if there is a correction. This is not a case of "take the money and run," but to check that you have some deeply defensive stocks that will more likely hold their own if the major indices slump badly.
He suggests five stocks that he believes will give you some protection should this happen.
- Abbott Labs (ABT) plays the field by selling hundreds of products to a range of customers. Abbott Labs will never be a rocket ship but sales have never fallen in any of the past 20 years -- 40 years of dividend payments
- Archer Daniels Midland (ADM) is an agricultural titan that can weather the price fluctuations inherent in this market. Currently analysts think that margins will be in their favor -- 36 years of dividend payments
- Verizon (VZ) has done a good job of moving from wired to a wired and wireless business. These are products that will be around forever -- even in hard times, none of us is likely to disconnect our wireless or wired data and voice services -- 7 years of dividend payments
- Loews (L) insurance is broadly diversified so that it is insulated from the vagaries of any one particular insurance niche. Loews also owns a hefty slate of energy assets, and the stock's current market value is lower than the book value -- 19 years of dividend payments
- Southern Co. (SO) is one of the stronger power utilities that has a strong history of dividend increases -- 10 years of dividend payments
I think it is timely as we enter the second quarter, to consider whether it is appropriate to add some lower risk stocks and evaluate their performance against our ETF dividend bearing portfolio:
|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 Safe Stocks to Own Before the Next Market Crash-- 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
|1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||0%||-1%||-9%||9%||72%||8%||58%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||5%||1%||6%||18%||125%||2%||10%|
|5 Safe Stocks to Own Before the Next Market Crash||4%||5%||26%||17%||100%||2%||7%|
It is not a surprise to see that this selection of stocks lines up relatively closely with the dividend ETF portfolio that deploys a strategic asset allocation. Over the past year, the focus on the US market has outperformed the more diversified portfolio but note that you have a lower Sharpe ratio which tells you that you have more risk for your return. To be fair, the ETF portfolio has monthly rebalancing, which is extra work.
The bottom line is that you have a solid selection of safe stocks that perform decently and can be a part of a larger portfolio.
Three-Month Chart One-Year Chart Three-Year Chart Five-Year Chart
The charts tell you the same story as the table -- the ETF portfolio and this stock selection maps relatively closely. There is benefit for broader diversification but this is a solid set of stocks to consider. I am sticking with my set of safety stocks so I am not going to make a change. For those who want to consider having a more risk averse set, this isn't a bad starting point.
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.