Market volatility increases in the late stage of the economic cycle, and that’s the stage in which we are operating, explains Bob Carlson; here, the editor of Retirement Watch highlights two conservative funds that can act as a hedge against economic risks.

As a hedge against a market decline, we own Hussman Strategic Growth (HSGFX). The fund invests in a portfolio of about 130 stocks that have solid recent growth, good momentum and reasonable valuations.

In addition, the fund can use futures and options either to leverage the portfolio in bullish times or hedge it in a bearish environment.

Manager John Hussman had a difficult time implementing the futures and options strategy following the financial crisis. He adjusted the parameters he used in late 2017 and has had better results since. The fund was hedged for most of 2018 and rose in value as the market declined.

Recently, Hussman said his market indicators shifted to neutral, so the fund’s position is “fairly neutral” at this point. While many of the technical indicators Hussman follows say investors are inclined toward speculation, there are other factors that indicate investors aren’t exuberant.

For example, about half of all stocks traded below their 200-day moving averages as the market indexes set record highs. The fund is down 3.37% in the last four weeks and 10.53% for the year to date.

Since the Fed isn’t inclined to increase interest rates and the economy has weakened, interest rates are low and more likely to decline than increase. Long-term bonds are good to own in this situation.

We’ve owned a position in gold as a hedge against inflation and geopolitical events. The best way to own gold is through iShares Gold Trust (IAU).

It has very low fees and isn’t widely owned by hedge funds and other investors whose fast trading can cause periodic anomalies in the pricing of an exchange-traded fund.

IAU is down 1.60% in the last four weeks but is up 0.24% for 2019. Rounding out the portfolio is a money market fund. We shifted this diversifying position out of intermediate bond funds after the Fed began its tightening policy in earnest.

In time, we’ll shift out of the money market fund. But for now, it provides the same yield as many intermediate bond funds with no risk to the principal.

Subscribe to Retirement Watch here…