Three “Fraidy-Cat” Mutual Funds
June 02, 2009 – by Richard Band
Low-Risk Mutual Fund #1
The classic formula for curbing stock market
risk is to invest part of your portfolio in bonds or
other fixed-income instruments. I’ve advocated this approach for the past 19 years in Profitable
Investing, and thousands of subscribers can testify it
has smoothed their path to prosperity.
Longtime readers know I’ve often recommended
Vanguard Wellington Fund (VWELX; 800/662-
2739) as a top candidate among the "balanced"
(stock plus bond) mutual funds.
To this day,
VWELX continues to shine, having outperformed
95% of its peers over the five years ended March
My only beef with Wellington (how’s that for a
weird pun?) is that Vanguard has raised the initial
minimum to $10,000.
If you’re already in, however,
I encourage you to add to your account — even now,
after the market’s big rise. I’m confident VWELX
will treat you gently, come what may.
Low-Risk Mutual Fund #2
For newcomers, there’s an even better choice
right now: Oakmark Equity and Income (OAKBX;
800/625-6275). Piloted by a seasoned skipper,
Clyde McGregor, who has managed the fund since
inception in 1995, OAKBX has performed even
better than VWELX lately, besting 98% of its class
over the past five years.
In disastrous 2008, for
instance, the Oakmark fund lost only 16%, versus
28% for the average "moderate allocation" fund
tracked by Lipper — a huge difference. Over the
same stretch, the S&P 500 stock index plunged an
even more harrowing 37%.
A fund that preserves capital in bad times has less
ground to make up in good times. McGregor has
proved, too, that he knows how to take advantage
of the market’s balmy seasons. During the last bull
phase (2003–07), OAKBX shot up 83%, for a total
return of 12.9% a year, compounded. Even a ‘fraidy
cat can purr over results like that!
Best of all…
Oakmark still requires only $1,000 to
open an account. No sales charges or redemption
fees. Buy now, and keep buying at regular intervals
to smooth out your cost.
Low-Risk Mutual Fund #3
Balanced funds are for conservative, belt-and-suspenders investors. If you’re a little more
venturesome, you might consider a fund that invests
in stocks but also writes (sells) call options against its
By selling options, the fund generates extra
income, which helps limit losses in a falling market.
However, the strategy can also put a drag on returns
in a sharply rising market as some of the fund’s
stocks (or cash) gets "called away" to satisfy the
The Eaton Vance fund group in Boston has a good deal of experience with option writing. I recommend
their closed-end Eaton Vance Tax-Managed
Diversified Equity Income Fund, which trades on
the NYSE under the ticker symbol ETY.
owns a number of the same stocks we’re carrying
in our model portfolio, such as ExxonMobil, IBM,
Microsoft, Hewlett-Packard, Nestle and McDonald’s.
Simultaneously, the fund writes calls against the S&P
ETY’s track record only goes back a couple of
years, but in 2007–08 the fund (at net asset value)
outperformed the S&P 500 by a handsome margin
of almost 14 percentage points.
Don’t be fooled by
ETY’s extremely high dividend yield as quoted by
most financial news outlets; most of it represents a
return of your original capital. The fund’s true cash
yield is about 2.4%.
As editor of Profitable Investing, Richard E. Band is the newsletter world’s #1 authority on investing for low-risk growth. His flagship Total Return Portfolio has tripled in value since its inception in 1990, while taking far less risk than the popular stock market index funds. See for yourself what Profitable Investing can do for you. In fact, try it for 6 months, 100% risk-free.