We've made several changes in our model portfolio to increase our margin of safety amid the market volatility, explains fund expert Bob Carlson, editor of the industry-leading advisory service, Retirement Watch.
Earlier in the year, we switched from a dedicated stock fund to the tactical asset allocation fund Leuthold Core Investment (LCORX).
The fund managers can shift the portfolio between cash, stocks (both U.S. and international), bonds (U.S. and international) and commodities. The fund also can hedge stock positions or sell stocks short. With the headwinds facing stocks, a tactical, nimble fund is a good way to approach the markets.
The fund began 2018 with a stock allocation of about 67%, but reduced that as stocks declined in February. The stock allocation increased during the year as markets recovered, but a portion of those stock holdings were hedged.
The fund lagged during the summer but held up well as stock indexes declined. It declined only 0.44% in the last four weeks and is down 1.34% for the year to date. LCORX remains defensive based on the technical and proprietary indicators it uses.
As of the beginning of November, the fund was 52% invested in U.S. stocks and about 18% hedged against stock declines. About 14% of the fund was in government bonds. Other investments had only small positions.
I am also recommending a position in a fund we used to own, Hussman Strategic Growth (HSGFX). The fund buys stocks that are attractively valued, compared to the present value of expected future cash flows, and that have attractive market action.
In addition, manager John Hussman can use options and futures to either hedge against market declines or to leverage the stocks to benefit from a bull market.
The fund turned negative in early February as the market correction was taking hold. That gave it positive returns, and after the correction it continued to generate modest positive returns until July. The market internals turned negative again in late September, and the fund hedged its positions.
If the market internals turn positive again, the fund will relax its hedging positions and participate in any rally. We did well with HSGFX during its heyday prior to 2009. Eventually, we sold the fund. Now is a good time to return it to our portfolios.
