Somewhere to Run

Given the recent scare in the markets, there’s plenty of sympathy for investors who want to dampen the risk in their portfolios.

Perhaps, as has happened to many investors, the charging bull market has raised the proportion of your retirement savings in stocks to a figure much larger than you intended. Or maybe stocks’ ups and downs of the last few days have convinced you that psychologically, you’re just not as risk-tolerant as you thought.

Herewith, a few alternatives:

Balanced Funds

These are mutual funds that own both stocks and bonds and, usually, a little cash. Most balanced funds have between 50% and 60% of their assets in stocks. Such funds generally will produce lower returns than an all-stock fund, but they also are far less risky.

Over the last five years, the average balanced fund had an average annual return of 12.2%, according to the Value Line Mutual Fund Survey, compared with 13.1% for the average growth-stock fund. But balanced funds have risk ratings that are one-third to one-half lower than those of stock funds.

In other words, they don’t bounce around so much, which can be reassuring when things go bad. During the last bear market (way back in 1990), the benchmark Standard & Poor’s 500-stock index dropped 14.7%, but balanced funds fell only 7.9% on average, according to Value Line.

“A good balanced fund will keep the ratio of stocks to bonds fairly constant over the years, and it won’t try to time the stock market or interest rates,” writes Robert C. Carlson, who chairs the Fairfax County Supplemental Retirement system, in the current issue of his Retirement Watch monthly newsletter ([800] 232-8197; $39 a year). Carlson’s favorite balanced funds are Vanguard Wellesley Income (five-year average annual return: 11.7%; phone: [800] 662-7447), with an extremely low risk and expenses of only 0.3% annually; Vanguard Wellington, which has returned a spectacular 15.7% a year on average since 1992; and Dodge & Cox Balanced (five-year average annual return: 16.2%; [800] 621-3979), which I bought long ago for my children.

Value Line’s highest-rated balanced funds are Westwood Balanced Retail (five-year average annual return: 17.3%; [800] 937-8966), managed by the perspicacious Patricia Fraze and Susan Byrne, and Founders Balanced (five-year average annual return: 16.2%; [800] 525-2440), which Value Line calls “a fine choice for conservative investors.”

Note, though, that both Westwood and Founders have a record of high turnover--that is, they trade their stocks and bonds frequently, thus generating capital gains to go along with taxable dividends.

Such activity is particularly troublesome under the new federal tax law. In order to be eligible for the new top capital gains tax rate of 20%, a security must be held at least 18 months--six months longer than under the old law. For a security held 12 to 18 months, any gain would be taxed at 28%. And for securities held less than 12 months, any gain would be taxed at your ordinary income tax rate, which for the wealthiest can go as high as 39.6%.

So funds such as Westwood and Founders are best held in a tax-deferred account.

Dodge & Cox Balanced and the two Vanguard funds have far lower turnover--the stocks and bonds in them are usually held for three to five years. These are better choices for tax-minded investors.

(For a list of the top-performing balanced funds over the last 12 months, see the chart on D4.)

Gold/Gold Stocks

Gold long enjoyed a reputation as the ultimate safe haven--the reasoning being that it’s supposed to be a constant store of value in a world where governments have an incentive to dilute their currencies.

But with inflation apparently under control, gold investments may seem an odd place to stash your money. The key word, however, is “apparently.” Not everyone agrees inflation is gone for good.

But if gold prices are any indicator, most folks think it is.

Gold and gold stocks were very poor investments in the last 10 years. Precious-metals mutual funds, for instance, have fallen an average of 1.9% annually since 1987, and they’ve fallen 24% in the last 12 months.

The price of gold recently hit $318 an ounce, a 12-year low, off an incredible 25% since 1990. But it may be that gold has reached bottom.

At any rate, although most people don’t have high expectations for gold, it, unlike high-flying stocks, doesn’t have a long way to fall. True, there is a risk that its financial importance could erode indefinitely, but it does have a base of demand in industrial, dental and jewelry businesses.

Despite all that, there are a few courageous gold bulls out there, among them Adrian Day, who edits the Investment Analyst newsletter ([410] 234-0691). He recently reminded readers that sentiment on gold has gone to extremely negative levels. “So, clearly,” he wrote, “this is a good time to buy gold bullion and bullion-type coins as a longer-term investment. It’s also a great time to accumulate the best of the gold stocks.”

Topping Day’s list of these is Toronto-based Barrick Gold Corp., which has 11 sites in North and South America and is generally considered the best-managed gold-mining and gold-producing company. The stock now trades at $23.50 on the New York Stock Exchange, down 23% from its 52-week high.

The bearish Charles Allmon, who for more than 20 years has demonstrated an uncanny sense for picking stocks, says that Franco-Nevada Mining Corp. and its companion company, Euro-Nevada, “are the only two gold shares in my managed accounts.” They also are two of only six stocks in the model portfolio of his Growth Stock Outlook newsletter.

Franco-Nevada, which, like its sister, trades on the Toronto Stock Exchange, has increased revenue and profit for 11 straight years despite the declining price of gold. In late June, management predicted that cash flow would rise 400% by 2002. Both stocks are up about 60% in the last 12 months.

Other high-quality gold stocks: Freeport-McMoRan Copper & Gold Inc., Placer Dome Inc., Newmont Mining Corp. and Homestake Mining Co.

Other Ideas

* Consider inflation-indexed U.S. Treasury bonds, whose returns are adjusted as consumer prices rise.

* Check out stocks that pay high dividend yields. Such yields often indicate good value, and their quarterly payouts can provide a dependable return even if their prices fall.

* Look at foreign markets that are already deep into bear markets. That list would include Thailand, the Philippines and Malaysia, as those countries have been forced to devalue their currencies recently.

Stephen D. Sjuggerud, editor of World Money Analyst ([800] 898-4685), is high on these markets.

“Now it’s time to go fishing,” he writes. There are closed-end funds (these trade like individual stocks) that specialize in the stocks of each of these countries.

(Note, however, that these markets could go much lower before they go higher.)

* If you want to keep your basic position in stocks, there are some funds that have historically kept most of their assets in the market but that have also owned other securities that have dampened overall volatility.

Fund tracker Morningstar Inc. highlights one fund that mixes common stocks, preferred stocks, foreign issues, bonds and above-average cash levels to provide “exposure to growth stocks without taking on too much risk.”

The fund’s five-year average annual return: 17.1%. Its name? The Haven Fund ([800] 844-4836). How appropriate.