How a Chicken Participates in the Next Big Rally

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Two relatively safe options to participating in the stock market that are especially appealing for a tax-advantaged account.

Some investors are flighty. Losing money bothers them more than the average person. Nevertheless, as the market continues to go up, they can’t help but wondering, “Is there a safe way to participate?”

Safe is a relative word. But compared to other investors, yes there is. By selecting funds that held up well in the last recession, if another catastrophe occurs, history suggests they will weather the storm better again.

Balanced funds that consist of both bonds and stocks are in this category. They did relatively well during the 2008 to 2009 decline. This was because the bond portion stayed afloat while the stocks went under leaving a shallower dip for the entire fund when compared to an all stock index. Vanguard Wellington Conservative Allocation Income (VWINX) demonstrates the point:

The Standard and Poor’s index (S&P), in green, plunged nearly 50% in early 2009, while the Vanguard Wellington Conservative Income Fund (VWINX), in blue, dropped much less

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about 22%. Chart from Yahoo.com

Of course, comparing the S&P to a fund that consists of both bonds and stocks is like equating apples to oranges. The S&P is composed only of stocks. The Vanguard Wellington Conservative Income Fund (VWINX) consists of about 60% to 65% bonds of various types and 35% to 40% stocks that historically produce above-average dividends or expect to increase dividends. The fund’s dividend is 3.47%. It is rated five stars by Morningstar.

Among other options that are similar is the Vanguard Wellington Income Moderate Allocation (VWELX) that is less geared for income and more for growth. In order to accomplish this goal, it consists of more or less the opposite proportion of stocks versus bonds than VWINX. Sixty percent to 70% of its assets are in primarily dividend-paying value stocks and 30% to 40% are in fixed income securities. The yield of the fund is 2.84%. It is rated five stars by Morningstar.

The Standard and Poor’s index (S&P), in green, plunged nearly 50% in early 2009, while the Vanguard Wellesley Moderate Allocation Income Fund (VWELX), in blue, dropped less — about 35%. Chart from Yahoo.com.

For the super chicken, the VWINX is the better choice. For those who can stand more heat, the VWELX would work. Other fund families like Fidelity have similar options.

One word of caution here; VWINX and VWELX are generally better for tax advantaged accounts. This is because they hold both bonds and stocks so the tax costs reflect any capital gains on the stocks (and bonds if applicable) plus dividends on both the bonds and stocks. The tax on dividends may go up in the future, making the income of the funds more painful in taxable accounts. Also, individuals in a high tax bracket often prefer municipal bonds in their taxable accounts, not corporate, which these two funds primarily hold.

So, thus far, bonds have buoyed balanced portfolios in unpredictable times. Although gold or collectibles do this too, they are not as easy or reliably profitable to deal with as the stock-bond mix. This because selling collectibles can be problematic. Gleaning income from gold is nonexistent. Balanced funds look pretty good.

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