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Battling a fierce headwind of soaring oil prices and a weakening global economy, stocks managed to rally in the second quarter. But there are worries just ahead, so I'd suggest booking profits, particularly if you got into oil, and playing defense.
That's what I plan to do. Truth is, oil prices may keep climbing -- but after what we've seen, it's a risky bet. A lot of experts expect a pullback.
I do have profits to take. My model portfolio of exchange-traded funds has spurted ahead 10.1% in the past three months, nearly triple the return of the S&P 500 Index ($INX). That isn't quite enough to erase the previous period's sharp losses, but it brought the portfolio back to a negligible 0.5% loss for the year.
The kind of turbulence we experienced in the first half is likely to moderate in the second, but the outlook is hardly unclouded.
"I believe the economy is a lot worse than the numbers indicate, and I think we'll have a year and a half of tough sailing," says Steve Rogé, a portfolio manager at R.W. Rogé in Bohemia, N.Y. "I'd be hesitant to get very aggressive even if oil pulls back to $100 a barrel."
I share that sense of concern -- and the sense that energy has gotten ahead of itself, as it does from time to time. So in my model ETF portfolio, I'm making two changes to my current defensive stance, taking profits from the oil patch and investing them in downtrodden commercial real estate.
Roaring natural resources
Those oil patch profits have been considerable: iShares S&P North American Natural Resources (IGE, news, msgs) shot up 26% in the second quarter. That position grew to 8.1% of the portfolio's assets during the period, and I'm cutting it back to something much closer to its original 5% allocation.The effect is to continue to overweight energy, which is well-represented in my diversified growth funds, but to reduce the portfolio's overall risk.
Here's how the portfolio finished the second quarter:*
| Fund | Shares | June 18 price | Value | % increase | % of portfolio |
|---|---|---|---|---|---|
370 | $62.05 | $22,958.50 | 9.6% | 14.6% | |
1,005 | $23.10 | $23,215.50 | 16.4% | 14.7% | |
225 | $70.28 | $15,813.00 | 16.6% | 10.0% | |
iShares S&P North American Natural Resources (IGE, news, msgs)** | 83 | $154.53 | $12,826 | 26.0% | 8.1% |
349 | $73.79 | $25,753 | 7.5% | 16.3% | |
166 | $49.07 | $8,146 | 10.7% | 5.2% | |
198 | $51.52 | $10,201 | 18.9% | 6.5% | |
210 | $75.75 | $15,908 | -1.5% | 10.1% | |
99 | $79.79 | $7,899 | 2.5% | 5.0% | |
Schwab Money Market Fund (SWMXX) | 14,808 | $1.00 | $14,808 | 0.5% | 9.4% |
Totals | $157,527 | 10.1% | 99.9%**** |
* For production reasons, quarters end on the Wednesday before the last Tuesday in each period. The first quarter closed March 19 and this one June 18.
**iShares S&P North American Natural Resources, formerly iShares S&P GSSI Natural Resources, changed its name during the quarter.
*** Vanguard Emerging Markets (VWO, news, msgs) split 2-for-1 during the quarter.
**** The percentages do not add up to 100 due to rounding.
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