How to Ride It Out

Market still making huge swings? Check.

Volatility indicators still near record levels? Check.

Overall market trend still downward? Certainly has been recently.

I don't know about you, but I'm getting tired of this.

Like some of you, I've been realigning my portfolio and investing some new money, but the market's whipsaws make it hard to feel good about many of these changes. It's like a hurricane, but even big hurricanes don't last more than a day or so. This one has lasted for weeks, and it's not done yet.

When a hurricane is about to hit your area, you have two choices: You can pack up all the possessions that will fit in your car and flee, or you can try to ride it out.

The former is safer, but by abandoning your property, you raise your chances of taking permanent losses. If you stay and ride it out, you put yourself in danger, but you might be able to hold things together during the storm -- and you can get started on repairs the moment the winds die down.

It's too late to flee this storm. Charts several years from now will likely show that the market went down and then went back up, and odds are we're closer to the low point than to the peak. Selling now would just lock in losses, and leave the chances of profits up to our market-timing skills. Unless you're a professional trader, market timing is a fool's (not a Fool's) game.

We've got to ride it out. We can move into sturdier shelters, but to have the best chance of recovery we've got to stay invested. But in what?

Limiting the downside, finding some upside
For many investors, the idea of holding just one or two investments in their IRAs has a lot of appeal. Even if they "check their accounts" regularly, many folks pay more attention to their 401(k)s or taxable accounts than they do IRAs, especially if they've only been contributing to the latter for a few years. A simple investment strategy that you can maintain with a minimum of fuss and that won't go too far astray if you ignore it for a year or two is often the right thing here.

During normal times, I usually suggest a small assortment of index funds or exchange-traded funds -- enough to give some diversification, not so many as to make rebalancing a frequent necessity. But these aren't normal times, and when the markets get rough I'm drawn to actively managed funds.

A good active fund is one with a veteran manager who has been through a market crisis or two and can pick and choose investments with an eye on current conditions and a sense of what the future is likely to bring. If the manager's fund has an investment objective that allows for a fairly conservative posture -- a partial allocation to fixed income, for example -- so much the better.

For years, the classic fund of this type was Fidelity Puritan (FPURX). Not the flashiest fund in good times, but a good place to hide when markets got rough, with respectable returns in all conditions. But Puritan's current managers are relatively new to the fund, and its recent performance isn't inspiring. Hammered recently by big stakes in stocks like ExxonMobil (NYSE: XOM  ) , IBM (NYSE: IBM  ) , and Cisco Systems (Nasdaq: CSCO  ) , it's down almost 30% this year. That's almost as bad as the S&P 500.

We can do better.

A promising find
My fellow Fool Amanda Kish, the mutual fund whiz who leads the Fool's Champion Funds newsletter team, recently spent some time looking into another balanced fund -- as funds that are equally weighted in stocks and bonds are called -- and came away quite impressed.

As she notes in her report in the new issue of Champion Funds, this is a fund that places a high priority on low volatility while still delivering strong returns. It does it by fishing for value and strength in neglected corners of the market -- among lower-rated bonds and micro-cap stocks, for instance. But don't get nervous -- while a mix of junk bonds and small caps might seem like a recipe for disaster, this fund's advisors -- a small team of veterans led by a manager who has run the fund for more than 20 years -- have made it work through just about every kind of market storm you can imagine.

A recent list of top holdings shows bonds from intriguing names like Xerox (NYSE: XRX  ) and Level 3 Communications (Nasdaq: LVLT  ) , as well as stocks you may have heard of, like Suncor Energy (NYSE: SU  ) and Watsco (NYSE: WSO  ) . But you'll also get a great bunch of nearly unknowns. Performance? It's down on the year, but only about half as far down as Puritan. And over the long haul -- the past 15 years --  it has beat the Russell 2000 index on an average annual basis -- quite a feat for a low-volatility fund that holds half its assets in bonds and cash.

So what's the fund? I hate to be a tease, but I'm going to insist that you check out Amanda's full report, in the new issue of Champion Funds. But never fear -- while Champion Funds is a paid service, a 30-day free trial is yours for the asking.

Your trial will give you full access to the current issue, the service's exclusive model investment portfolios, all past issues and recommendations, and the members-only message board -- all for free, with no obligation. Check it out now -- your portfolio will thank you.

Fool contributor John Rosevear has no position in the stocks mentioned. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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