Investing: Testing the waters for a return to stocks

“Sooner or later, you’re going to have to tiptoe back into the stock market,” said John Waggoner in USA Today. Even after its recent rally, the Dow Jones industrial average is still down more than 40 percent from its 2007 high. “Ironically,” though, if the bottom dropped out of your portfolio last year, “the stock market is probably your best bet at getting even.” That doesn’t mean investing directly in stocks. Several breeds of mutual fund—balanced funds, asset allocation funds, and target maturity funds—mix stocks and bonds in ratios determined by such factors as your appetite for risk or your retirement date. Feeling brave enough to commit to particular companies? “Consider a fund that invests in stocks that pay steady dividends.” These funds aren’t immune to stock market gyrations, but the dividends do help smooth the ride.

Even a simple rebalancing of your portfolio can do the trick, said Paul Lim in The New York Times. Many investors consciously shifted to more conservative investments over the past year. Even those who didn’t, though, will have seen their relative investment in stocks decline—simply because “the equity stake in these accounts contracted with the market” while bonds didn’t fare nearly as badly. “For as long as 401(k) accounts have been around,” stocks have represented the bulk of 401(k) assets. In February, however, they took a back seat to bonds and cash for the first time since Hewitt Associates started keeping track, in 1997. Right now stocks account for about 48 percent of 401(k) assets, compared with 69 percent in 2007. If your allocation is out of whack, restore your portfolio to a ratio of stocks to other assets that’s appropriate for your age and life plans.

Squeamish investors might also want to shift 5 percent to 10 percent of their assets into a convertible-securities fund, said Steven Goldberg in Kiplinger.com. “Like a bond, a convert pays an investor a fixed rate of interest. But converts can be exchanged for stock of the issuing company at a preset price.” Converts typically do well during bull markets, but they have also “spared investors a lot of the pain of bear markets.” Over the past 10 years, converts gained an average of 2.4 percent while the Standard & Poor’s 500 lost 3 percent. These hybrid investments are complicated, so investing in them through a fund makes sense. “My favorite convertible fund, Vanguard Convertible Securities, gained an annualized 5.1 percent.”

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