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The S&P 500 Index ($INX) officially entered bear market territory last week, and those of you who own bear market mutual funds and exchange-traded funds have been preparing for this moment.
Most of us, though, don't venture into that arena, because those funds are not good long-term holdings.
But current events remind us how difficult it can be to reconcile our long-term plans with the punishment a bear market can inflict. Are there funds defensive enough to stand up to today's market yet with qualities that will endure for tomorrow?
"Everybody is scrambling for answers" to that question, says Axel Merk, the manager of the Merk Hard Currency Fund (MERKX). He offers his portfolio as one of them, and I concur. Investing almost entirely in the highest-quality government bonds in the world, this fund has spurted 7.4% this year, as of July 9, and an average of 12.6% in each of the past three years.
I have four others to offer, too. Each has attributes that make it appealing as a long-term holding, as well as qualities with particular appeal right now. They range across asset classes and continents; nearly every portfolio will have room for at least one of these:
Merk Hard Currency Fund: Born in Germany, which experienced some of the worst inflation the world has ever known after World War I, Axel Merk detests inflation and knows how to combat it.
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"What you're doing is buying a basket of hard currencies," he explains. "You're buying cash in euros, in the Canadian dollar, the Swiss franc and the Australian dollar."
Unlike U.S. cash, these three-month treasury bills aren't worth less when they mature than when you bought them.
The Merk fund also has about 8% of its assets in gold, mostly gold bullion owned in the form of SPDR Gold Shares (GLD), an exchange-traded fund, or ETF. Note that while money market funds also invest in short-term government debt, Merk Hard Currency is not a money market; it's a global bond fund.
Van Eck Global Hard Assets A (GHAAX): This fund tracks the S&P North American Natural Resources Index, exactly like iShares S&P North American Natural Resources (IGE), the ETF that I use in my MSN model ETF portfolio. The difference is that the Van Eck fund vastly outperforms its benchmark.
In the 12 months ending June 30, this fund soared 43.7%, compared with the benchmark's 29.3% return. The outperformance has been nearly as great for five years running: The mutual fund is up 39.7%, annualized; the benchmark is up 30.1%.
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A different bear marketStocks are in better shape now than they were in the 2000-02 bear market, but the economy is far sicker, Jim Jubak says. Look for a stock recovery to lead the economy by more than the usual 6 months.
The fund has 63% of assets in energy names, 14% in industrial metals and 11% in precious metals. These are called hard assets because they're impervious to inflation; indeed, the high prices they command are evidence that U.S. inflation is roaring. It doesn't look to us as bad as it is because we pay in dollars, but our currency's value is withering steadily.
Vanguard Inflation-Protected Securities (VIPSX): This is certainly the VIP of U.S. bond funds, which are being scourged by what this fund is inoculated against: inflation. It's ahead 17.4% in the 12 months ending July 9 and an average of 6.5% in each of the past five years.
Treasury inflation-protected securities are called real-return securities because their coupon is supplemented by an annual increase in the value of their principal equal to the rise in the Consumer Price Index. Conventional bonds deliver their return in their coupon alone, which inflation can seriously erode. Long-term government bonds currently are yielding around 4.6%, little more than the current 4.2% inflation rate.
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