5 Funds for an Uncertain Market

07/15/2011 8:00 am EST

Focus: FUNDS

Broad diversification is the best strategy for individual investors in light of today’s volatile market conditions, says Jude Boudreaux of Upperline Financial, who tells Kate Stalter about five funds that should smooth out some of the turbulence.

Kate Stalter: We are talking today with Jude Boudreaux from Upperline Financial in New Orleans. Thank you very much today for joining us, Jude; great to have you here.

Jude Boudreaux: My pleasure.

Kate Stalter: So one of the first things that I wanted to ask you about today: What is your view of the current market conditions, and what does an individual investor really need to know about right now?

Jude Boudreaux: My general view of the market is the line that JP Morgan used to use: It will fluctuate. It is very hard for us to predict the future, but we know it is going to go up, and we know it is going to go down.

Right now, there is a lot of uncertainty, and more than anything the market hates uncertainty. So as we work through that crisis in Europe, budget talks, and the stalemate right now with all the negotiations over the debt ceiling, there are a lot of reasons to be concerned as an investor.

There are a lot of positive things happening, too. Corporate earnings seem to be rebounding, although jobs don’t seem to be following.

So I think that right now, the market has a lot of volatility to deal with. That is just where we are going to be until the market feels like we have some more certainty or a clearer path moving forward.

Kate Stalter: Given all this uncertainty, then, what are the sectors, industries, or even global regions that you believe are showing some strength, at this moment? Why do you see these as being in favor?

Jude Boudreaux: Well, I don’t really see any particular industry or global region; although I would say Brazil right now seems to be one of the stronger economies globally.

I think the best approach for an individual investor is to be very broadly diversified, and try to participate in a lot of different regions of the market—particularly internationally.

I see a lot of American investors seem to have kind of a domestic tilt toward their portfolios, when the United States economy is only really 35% of the world’s economy. We need to take advantage of being very broadly diversified including globally.

I think very low-cost funds are the way to do that for most folks.

Kate Stalter: Any particular regions, sectors, or subindustries that you think really should be avoided right now?

Jude Boudreaux: The only thing I would say, I am very clear on avoiding long-term debt. Interest rates are so low right now, and I can’t see going and buying 30-year instruments at 5%, 6%, or even 7%. Ultimately, bonds have had a very nice run, but lot of that has had to do with the low interest rates driving up the price of existing issues.

I think we are going to have to see some reversion to the mean eventually. So I’m keeping things very short term on the fixed-income side.

Kate Stalter: Given all this, Jude, what are some of the investment vehicles that you are using frequently these days to meet your clients’ objectives?

Jude Boudreaux: Well, I am a big believer in very broadly diversifying, as I mentioned.

Two things we can control in portfolios are costs and taxes. So I use the Dimensional Fund Advisor funds with all my clients—mainly through third-party investment managers like Symmetry Partners or The Planning Center—so that I don’t have to be involved with the day-to-day rebalancing, or buying, or selling of different funds as new flows come into the portfolios.

So really, I am just using DFA funds, mainly the short-term bond funds, the One-Year Fixed Income Portfolio (DFIHX), the Two-Year Fixed Income Portfolio (DFGFX), and the Five-Year Global Fixed Income Portfolio (DFGBX). Then I use the DFA US Core Equity Fund (DFQTX) and Global Equity Fund (DGEIX) to have a really broad exposure to the marketplace as a whole.

So domestically, and then using the international, to have clients in a couple of thousand different issues, and to have a global exposure.

Kate Stalter: All right. Any other ETFs or funds that you care to mention that you might turn to for any specific reasons?

Jude Boudreaux: Nothing else really comes to mind. If somebody is doing this himself at home, it would be very easy to pick up a couple of market-based ETFs, as far as index funds, to kind of replicate the similar idea of being low-cost and fairly passive on the management side. I think that is a solid way to go for individual investors.

Beyond that, I really don’t have anything that I am looking for, for additional alpha. The longer I am in this business, the more I question the ability of active managers to deliver alpha, so I just try to stay away from it.

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