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Strategies for a Volatile Market

By Daren Fonda
Kiplinger’s Personal Finance

Feeling skittish about stocks? You're forgiven. Some strategists say stocks have climbed too far, too fast, since the election, reflecting hopes for gains in the economy that may never come. Doubts about the administration's ability to work with Congress to pass President Trump's legislative agenda have heightened market volatility, too. If all this has you spooked, here are four ways to protect your gains or profit from a slump:

Take some money off the table. Rising prices may have pushed your stock holdings above your target investment mix. If a year ago you held 65 percent in stocks and 35 percent in bonds, your stock allocation could be more than 75 percent today. Shifting 10 percent of your portfolio from stocks into cash or bonds will get you back on track. Bond funds we like include DoubleLine Total Return Bond (DLTNX) and Pimco Income Fund (PONDX), both members of the Kiplinger 25, our favorite no-load funds.

Embrace the bear. Bear-market mutual funds or ETFs may sell borrowed shares that they hope to replace later at a lower price, thereby profiting if prices fall. The funds may also use options or other strategies to wager against the market. Pimco StocksPlus Short Fund (PSSDX) aims to replicate the opposite of the daily return of Standard & Poor's 500-stock index. The fund needs only a small amount of assets to carry out the strategy. It invests leftover cash in low-risk bonds, generating income on the side.

Hedge your bets. Long-short funds have the flexibility to bet on stocks (with a long position) or against them (by short selling). Schwab Hedged Equity (SWHEX), for instance, holds 270 stocks, with about 57 percent in long positions and the rest in stocks held short. With an annualized return of 8.3 percent over the past five years, the fund, not surprisingly, has been unable to keep up with the stock market. In 2008, however, the fund lost just 20.5 percent, compared with the S&P 500's 37-percent plunge.

Trust in Uncle Sam. Long-term Treasury bonds have lost fans as interest rates have increased (pushing bond prices lower). But Treasuries can provide stability when the stock market turns rocky. While the S&P 500 lost 37 percent in 2008, for example, Vanguard Long-Term Treasury Fund (VUSTX) gained 23 percent. The fund recently yielded 2.8 percent. But protection comes at a price: Steeper interest rates would send the prices for long-term Treasuries lower.

Editor’s Note: Daren Fonda is an associate editor at Kiplinger's Personal Finance magazine,

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