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Risk-Averse Investment Hedges to Protect Yourself From Volatile Markets

Barbara Friedberg

Most asset allocation calculators tout the benefits dedicating high percentages your portfolio to stocks for all but the most conservative investors. This is wonderful advice if you’re comfortable with losing considerable capital during occasional down years. The S&P 500, including dividends, lost 4.23% in 2018 while in 2008 investors saw 36.55% of their U.S. stock portfolios vanish. Cash and short-term bond funds are ideal investment hedges for volatile markets.

The fourth-quarter S&P 500 loss of 13.97% is a perfect example of why holding cash and short-term fixed income funds is the perfect salvo for a choppy market. The $57 billion December inflows into money market funds is a reminder not to overlook cash investments.

A 100% allocation to an all-world stock fund such as the Vanguard Total World Stock ETF (NYSEARCA:VT) cost you -9.76% in 2018. Cushion that allocation with 65% invested in VT and 35% in fixed investment Vanguard Short-Term Bond ETF (NYSEARCA:BSV), and your 2018 loss declines to -5.88%. So, the 2018 BSV return of 1.34% cushioned the S&P 500’s fall.

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Fixed Investment Funds to Calm Stock Market Volatility

With rising interest rates, there are several options for higher fixed income yields. These investment hedges will help you sleep at night and shield your investments from excess volatility.

Vanguard’s Prime Money Market Fund (MUTF:VMMXX) will preserve the $1.00 share price and as of January 16, 2019, offers a 2.46% SEC yield. Should interest rates rise, so will the returns on this fund. The liquidity makes a money market mutual fund ideal for investors and seeking a hedge for investment market volatility. Another alternative, Schwab’s Value Advantage Money Fund Investor Shares (MUTF:SWVXX) offers a 7-day yield of 2.32%.

Despite their lack of glamour, a short-term bank certificate of deposit can provide a decent hedge to the stock market. Limelight, Sallie Mae, and Life Oak Banks all offer one-year CD rates of 2.85%.

Traveling slightly up the fixed investing risk ladder, you can eek out higher yields. In exchange for higher yields, the following funds might deviate slightly from the $1.00 share price.


The previously mentioned Vanguard Short-Term Bond ETF (NYSEARCA:BSV) tracks the performance of the Bloomberg Barclays U.S. 1- to 5-year government/credit float adjusted index. This market-weighted bond index covers U.S. Government and investment-grade corporate bonds with maturities from one to five years. The average duration is 2.6 years with a yield to maturity of 2.8%. With a 0.07% expense ratio, this fund is a low-cost alternative to owning individual bonds.

The iShares iBonds Dec 2020 Term Corp ETF (NYSEARCA:IBDL) tracks the Bloomberg Barclays December 2020 Maturity Corporate Index. The index invests 90% of its assets in corporate bonds with maturity dates between December 31, 2019 and December 16, 2020. The 2.36% yield is competitive, and the short-term maturity dates suggests a stable share price. The 0.10% expense ratio makes IBDL an attractive low-cost short-term bond fund.

If you’re willing to withstand additional price volatility, the Vanguard Intermediate-Term Bond Index Inv (MUTF:VBIIX) offers a higher yield of 2.77%. This fund tracks Bloomberg’s Barclays U.S. 5-10 Year Government Index and includes medium and larger issues of U.S. government and investment grade corporate bonds. With an average duration of 6.3 years, the share price will vary more than the prior fixed income choices.

The new Betterment Smart Saver option demonstrates the importance of a short-term fixed cash allocation. And, Schwab Intelligent Portfolio detractors, who complained about their cash allocation aren’t saying too much right now. These past few months reminded investors that the stock market is risky and fixed investments can add comfort to the volatile equity market.

As of this writing, the author held no positions in the aforementioned securities.

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