When stock markets began to whipsaw this summer, Tony Zabiegala decided to take some money out of stocks. The Cleveland-based adviser reduced most of his clients’ equity exposure, getting down to just 10% for the most risk-averse. But while it seemed like the right move through the ups and downs of August and September, when stocks rallied in October, Zabiegala and his clients mostly missed out. “We didn’t see it coming,” says Zabiegala.
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He’s not alone. Picking winners during the past few months of uncertainty has proven difficult for most investors — even the pros. While stocks are up 5% for the year, they’ve had an unsettling climb. Many investors have fled stocks for bonds, only to find that most bond yields are sinking and most bond fund managers are trailing their benchmarks thanks to bad bets on riskier issues. Even investments that are supposed to zig when the market zags, like oil and gold, have been moving much closer with stocks, making it difficult for investors to figure out the next step. “Many investors are looking around for ways to hedge their portfolios risks,” says Christine Benz, director of personal finance for Morningstar. “Some of those bets have not been particularly profitable so far.”

Of course, some of these bets will eventually pay off, say financial advisers. Many are telling clients to sit tight through this rocky market — and for good reason: Study after study has shown that most investors can’t accurately time the market’s ups and downs; they buy high and sell low. Inertia, on the other hand, is often rewarded: An investor who invested in the S&P 500 in March 2009 is currently up about 95%, including dividend payments, says Andrew Goldberg, market strategist for J.P. Morgan Funds.

That said, there are some investments financial advisers recommend dumping or scaling back on or avoiding if you don’t already own. Some have already seen their best days; others simply don’t provide strong enough returns to offset their high costs. Below are four investments advisers say you should think twice about before owning.
Closet Index Funds

With stock market gains inconsistent, advisers say finding a low cost mutual fund that won’t erode your returns in fees is extra important. Few investors who go the active route are seeing the benefits: the average actively managed large blend fund is under performing the S&P 500 index so far this year by 3 percentage points, according to Morningstar. Many investors might be better off in a low-cost index fund that will at least match the index, says Benz. The cost of fees adds up dramatically: paying the average 1.04% fee on an no-load actively managed large blend fund instead of the 0.18% fee on the Vanguard Total Stock Market Index fund (VTSMX) can cost you an additional $3,000 over 20 years, according to Morningstar.

Some funds are even more expensive and often simply move in line with their benchmark index, says Diane Pearson, an adviser with Legend Financial Ad visors. Take the $1.8 billion Lego Mason Clear Bridge Fundamental All Cap Value fund (SHFVX), which tends to move in line with the S&P 500 index but has lagged it by an average of more than 2 percentage points a year for the past five years. In addition, the fund charges 1.32%, compared to the average 1.14% for other large cap front load funds, according to Morningstar. Legg Mason declined to comment.

Of course, advisers say there are some smart managers worth the higher fees. But many say it’s best to save active management — and the higher costs that come with it — for asset classes like fixed income or small cap stocks where it takes more work to determine value and an analyst digging for smart picks can really add a bonus. “You don’t want to pay 1.7% on a fund that tracks the S&P 500,”says Pearson.
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U.S. stocks have rallied fiercely since Thanksgiving, but the S&P 500 index is still 8% below its 2011 high, reached in May. The stocks listed below have done better. On Monday, they all hit new highs for the year.
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That doesn’t make these stocks expensive. In fact, they turned up in a search among large, mid-size and small U.S. companies for stocks that were both hitting new 2011 highs and selling for less than the S&P 500′s price of 13 times forecast earnings.

Value investors can think of these three as modestly priced shares that happen to have gained of late. Momentum traders can think of them as recent risers that happen to still be cheap.
Humana

2011 Price-to-Earnings Ratio: 10

Humana (HUM: 86.20, -0.36, -0.42%) is the largest publicly traded health benefits company, with yearly revenues of more than $36 billion. It’s also one of the largest providers of Medicare Advantage plans, whereby Medicare patients opt for service from private companies rather than the government. The recent failure of a congressional “super-committee” to achieve targeted budget cuts triggered automatic cuts to Medicare spending in future years.

But David Windley, who covers Humana stock for investment bank Jefferies & Company, called looming cuts “relative child’s play” in a note last month to clients. Humana has survived worse threats to its bottom line in recent years, according to Windley, and the outlook in Washington, D.C., offers “more certainty now than in the last five years.” Medicare Advantage is “increasingly viewed by friend not foe” by policymakers looking for savings. Humana’s goal is to run its Medicare Advantage plans at a 15% savings to Medicare, with the extra funds used to reduce premiums and add benefits (thereby luring customers) and to bolster profits (thereby offsetting budget cuts).

The company has beaten earnings estimates by more than 30% in each of its past two quarters.
Lithia Motors

2011 P/E Ratio: 13

Lithia Motors (LAD: 23.30, -0.21, -0.89%) operates 86 U.S. dealerships in 11 states where it sells 28 new car brands and a variety of used car brands. Its stock was nearly totalled by the financial crisis of 2008 and 2009, plunging to $2 and change. Since then it has recovered to more than $24. U.S. light vehicle sales hit a 27-year low of 10.4 million units in 2009, but have since rebounded and are on pace for 12.8 million this year. Analysts project sales of 13.5 million light vehicles next year.

Lithia’s earnings per share are expected to double this year on a 26% increase in revenues. Last quarter the company bought two dealerships and sold one, reduced expenses as a percentage of gross profit, bought back shares and paid a dividend. It also projected that sales at longstanding stores would increase 9% next year.
Macy’s

2011 P/E Ratio: 12

Macy’s (M: 32.76, -0.19, -0.58%) November sales at longstanding stores increased 4.8% from a year earlier, beating Wall Street’s 4.1% forecast. The company, with 850 stores under the Macy’s and Bloomingdale’s names, cashed in on general strength in Christmas shopping. Consumers spent 16% more on Thanksgiving weekend than a year earlier, according to the National Retail Federation. Macy’s also reported a 50% jump in online sales.

Kenneth Stumphauzer, who covers the stock for Sterne Agee, an investment bank, wrote in a note to clients that Macy’s is set up for a strong December, too. November was the most difficult comparison month for the year, he wrote, and an unseasonably warm Black Friday might have cut into sales of cold-weather clothing. Those sales should shift forward, he reckons, helping December’s numbers. And compared with last year, December this year gets an extra shopping day before Christmas.

Read the full article here:
3 Cheap Stocks Hitting 2011 Highs

This Thanksgiving weekend, Wall Street should say a prayer of gratitude for Occupy Wall Street.

While some bankers and brokers have sympathized with or supported this ragtag protest movement, others grouse that they are being demonized.
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But compared with financiers of the past, who faced nasty rhetoric, political hostility and physical danger, today’s bankers and brokers seem like a bunch of babies when they whine about being targeted by these dissidents.

The “Occupy” rhetoric might sound overheated, but it is golden praise alongside what bankers used to hear.

In 1870, the essayist Henry Adams compared the financier Jay Gould to a spider; Joseph Pulitzer, the famous editor, later called Gould “one of the most sinister figures that have ever flitted bat-like across the vision of the American people.”

In 1883, a young New York state legislator named Theodore Roosevelt lambasted “the wealthy criminal class” on Wall Street. In 1910, Sen. Robert LaFollette of Wisconsin called J.P. Morgan “a beefy, red-faced, thick-necked financial bully, drunk with wealth and power.”

Between 1892 and 1911, at least 53 bills were introduced in Congress to stifle speculation and derivatives trading, although none quite became law. No fewer than 21 states including California, Illinois, Massachusetts, Ohio and Texas passed laws restricting speculation, short selling or trading in futures or options.

The Occupy Wall Street protesters have also been far more peaceful than their forebears.

On the original “Black Friday” not the shopping day after Thanksgiving, but Sept. 24, 1869, when Jay Gould cornered and crashed the gold market fury was in the air. “An angry mob gathered howling for vengeance,” wrote historian Maury Klein in his biography “The Life and Legend of Jay Gould,” and “a company of militia was hurriedly ordered into readiness.” Gould slunk out a backdoor to safety, guarded by a gang of armed thugs.

In 1877, a speculator who had lost money betting against Gould ambushed him on the sidewalk, slugging the financier and then flinging him down an eight-foot flight of stairs into the basement of a barber shop. Gould was battered but unbowed, although he never again walked the streets without a bodyguard.

In 1891, an assassin tried to kill the investment banker Russell Sage by detonating 10 pounds of dynamite. The bomber and Sage’s secretary were killed; Sage survived, perhaps by using a messenger as a human shield. In 1892, an anarchist shot Henry Clay Frick point-blank in the neck; the mogul survived. J.P. Morgan and John D. Rockefeller, among other financial barons, faced frequent death threats.

In September 1920, a bomb went off in a horse-drawn wagon parked in front of J.P. Morgan & Co. on Wall Street, killing 40 people; the criminal was never found.

Wall Street rarely concedes that regulation has made the markets safer not only for investors but for Wall Street itself. Because the public believes that modern regulation enforces standards of fairness that were lacking in the past, bankers and brokers don’t have to fear for their lives when they walk down the sidewalk.

Wall Street hasn’t yet had to answer to a higher authority, either. In 1940, the investing writer Fred Schwed recalled the eve of the Crash of 1929:

“There was a luxurious club car which ran each week-day morning into the Pennsylvania Station. When the train stopped, the assorted millionaires who had been playing bridge, reading the paper, and comparing their fortunes, filed out of the front end of the car. Those who needed a nickel in change for the subway ride downtown took one [from a bowl near the door]. They were not expected to put anything back in exchange; this was not money. It was only five cents [roughly 65 cents in 2011 dollars].

“There have been many explanations of the sudden debacle of October, 1929. The explanation I prefer is that the eye of Jehovah, a wrathful god, happened to chance in October on that bowl. In sudden understandable annoyance, Jehovah kicked over the financial structure of the United States, and…the bowl of free nickels disappeared forever.”

Mr. Schwed, who died in 1966, might be shocked to realize that the bowl didn’t disappear forever after all. Government bailouts in the latest financial crisis distributed billions of free nickels to failing banks staving off collapse and enabling the banks to speculate anew with cheap money.

Perhaps, as was true after the Crash of 1929, we will only know that this long bear market is over when, at long last, it consumes the people who perpetrated it. Above all, Wall Street should be grateful that Jehovah hasn’t kicked over this bowl of nickels, too at least, not yet.
—intelligentinvestor@wsj.com; twitter.com/jasonzweigwsj
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Bankers Are Getting Off Easy With Occupy Wall Street

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AAA-Rated Companies With 3% Dividends

One way to make sense of the price investors are paying for a company is to compare it with the thing investors are attracted to in the first place: underlying prosperity. Facebook’s revenues doubled to $1.6 billion during the first half of 2011, according to a Reuters report citing a source with knowledge of company financials. Given the growth trajectory, many investors believe Facebook will bring in $4 billion in sales this year. That puts the stock’s projected price at 25 times revenues.

By that measure, Facebook would be more expensive than all stocks in the S&P Composite 1500 index of large, midsize and small companies. The index’s median price-to-sales ratio is 1.2.

Profits are more difficult to guess, but here’s a start: During the first three quarters of 2010, Facebook reportedly had a profit margin of nearly 30 cents on the dollar. Google (GOOG: 621.72, -2.05, -0.33%), a dotcom firm with comparable scale and publicly reported finances, turns 27 cents of each sales dollar into profit, so 30 cents seems credible.

That puts Facebook’s 2011 profit at $1.2 billion, and its price-to-earnings ratio at 83. Among peer companies, only Amazon.com is that expensive — and only because its profits this year are expected to plunge by half on higher expenses before rebounding next year. Historically, U.S. firms have traded at an average of around 15 times earnings.

Another way to think about Facebook’s estimated $100 billion value is as a Wall Street shopping budget. What sort of firms could investors buy with that money?
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They could buy General Mills (GIS: 40.32, -0.13, -0.32%), the packaged food giant, plus insurance underwriter Travelers (TRV: 54.88, -0.06, -0.11%) and Clorox (CLX: 65.35, -0.31, -0.47%) — which sells far more than bleach. Add Waste Management (WM: 31.51, -0.11, -0.35%), the nation’s largest trash collector, and Raytheon (RTN: 45.62, -0.02, -0.04%), a key defense contractor. Throw in Darden Restaurants (DRI: 41.67, -0.17, -0.41%) , owner of the Olive Garden and Red Lobster chains. Top it off with tool specialist Snap-On (SNA: 51.63, -0.35, -0.67%) and toy maker Hasbro (HAS: 36.84, -0.29, -0.78%). Either pocket the extra couple of billion dollars or grab a utility.

Fast growers, these eight firms aren’t. Most are expected to increase their sales by single-digit percentages in their current fiscal year. But they’re starting off from a much higher income base: 24 times Facebook’s estimated sales and six times its estimated profits. Plus, they pay an average dividend yield of 3.5%.

The point, of course, is that the earliest glimpse of Facebook’s IPO makes it look plenty pricey. This column voiced similar concerned about recent dotcom IPOs from LinkedIn (LNKD: 73.40, 0.16, 0.22%) and Groupon (GRPN: 19.29, 0.05, 0.26%), both of which rocketed higher on their first day of trading but have since fizzled. Facebook is worth a lot, but it’s not worth any price. If $100 billion is indeed the figure, prudent investors should leave it alone.

Read the full article here:
$100 Billion for Facebook? Buy This Instead

They give us ice wine and Tim Horton’s doughnuts. Now our neighbors to the north are providing something many Americans consider harder to find: a steady, conservative investment.
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Tired of the turbulence in the global debt markets, American investors have been pouring into Canadian government bonds. Through October, investors bought $7 billion worth of the country’s sovereign bonds and government-backed debt, up 12% from the start of the year, to $67 billion, according to the most recent data available from fund tracker Morning star and Ipreo, a market research firm.

All that excitement has even spurred a first: an all-Canada bond fund, launched this month by fund giant Pacific Investment Management Co – the PIMCO Canada Bond Index Fund (CAD: 102.40, 1.40, 1.39%).

At current rates, 10-year Canadian bonds are in line with Treasury, at just above 2%. But fans say their allure is about more than yield in an environment where investors are fleeing European government bonds as the debt crisis drags on and some analysts are saying the United States is at risk of another credit downgrade. Given all that, Canada has emerged as one of the last true safe havens available to investors, says Ronald Deutschmark, managing director of advisory firm Sage Capital Management.

Indeed, of the 15 countries that have retained their triple-A ratings by Standard & Door’s, Canada has the fourth largest bond market behind the United Kingdom, Germany and France.

With its low inflation and modest debt, “Canada from a credit-quality perspective is the soundest ” of these top-rated countries, says Brendan Murphy, director and portfolio manager of global fixed income for Standish Asset Management Company.

Financial advisers also like Canadian government bonds for the diversification they provide against the dollar. The bonds are denominated in local currency, so if the Canadian dollar gets stronger against the greenback, the bonds end up worth more than the yields suggest, says Paul Christopher, chief international strategist for Wells Fargo Advisers.

Still, the growing popularity has already caused the payouts on Canadian bonds to shrink the 10-year bond yielded more than 3% less than a year ago, according to Fact Set Research. (As bond prices rise, yields decrease.)

And the options for getting exposure to these bonds are limited. Investors who want to buy individual bonds must purchase them through their brokerage firm, which will shop around for sellers and negotiate a price; there is no equivalent of Treasury direct.gov, where people can purchase Treasury on their own. Investors typically must spend a minimum of $1,000, but experts say the bigger the purchase, the better the pricing.

For fund investors, analysts say the only pure play is the Picot Canada Bond fund, which invests solely in government bonds.

Another strategy, says Peter Maris, a financial adviser in Wilmette, Ill., is to invest in a diversified foreign-bond fund with a sizable allocation to Canada. He likes the Looms Sayres Global Bond fund, which has 8% of its assets in the country’s bonds.

Read the full article here:
For Bond Safe Haven, Investors Look North

It’s a fact that doesn’t escape Joe Jimenez: At Novartis (NVS: 54.20, -0.09, -0.17%), the big pharmaceutical firm he heads, about one-fifth of last year’s net sales, some $10 billion, could, in the not-too-distant future, simply disappear. That’s what happens when your two top-selling drugs lose patent protection. Jimenez also just saw his firm’s longtime head of drug development leave to do charity work. So the CEO’s big plan: replace the eventual lost sales from Divan and Gleevec, blood pressure and cancer treatments, respectively, with higher sales from…contact lenses?
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The challenges Novartis, the world’s second-biggest-selling drug maker, faces aren’t unique to the industry — a slew of multimillion-dollar blockbuster drugs are losing patent protection over the next few years — but the Swiss firm’s answer to the problem is. Instead of shrinking the firm dramatically (as Eli Lilly (LLY: 39.53, 0.67, 1.72%) is doing) or merging with another Big Pharma firm (as Merck (MRK: 35.29, -0.11, -0.31%) has done), Novartis spent about $48 billion over three years to buy Alcon, whose entire product line of surgical devices, drugs and, yes, contact lenses is geared toward improving eye care. That business contributed a hefty $5 billion in sales for Novartis in the first half of 2011, an 11 percent increase compared with the same period a year ago. Jimenez says the Alcon acquisition, completed earlier this year, will not only increase Novartis’s profits but also diversify its business away from relying on successfully producing and selling blockbuster drugs. “We expect eye care will continue to experience growing demand well into the future,” says Jimenez, 51.

Analysts seem to like the move. Sho Matsubara, a senior equity analyst at Standard & Door’s Capital IQ, for one, says Novartis looks undervalued — though so far, the market isn’t on board. While Novartis stock is up 16 percent since Jimenez took the reins in February 2010, shares of big drug makers, as a group, are up 28 percent. The company, meanwhile, has taken certain measures — including laying off at least 1,400 people in the U.S. over the past year — to respond to what it calls “shifts in the external environment.”

Many analysts, however, say they like the moves that Jimenez, who previously spent a combined 17 years as an executive at H.J. Heinz and Clorox, has made so far. Smart Money caught up with the man to talk about the state of Big Pharma — and what continues to be the elusive magic elixir for drug makers.

What are you doing to deal with the big wave of drugs losing patent protection?

We’ve had years to plan, so we invested in the late-stage pipeline. We started some clinical trials that were concurrent instead of sequential so we could generate the kind of sales growth that we need to get through this patent cliff.

What are the growth markets for Novartis?

We invested in China and Russia, among others. We like places that have good track records for pharmaceutical intellectual property, which is why we aren’t investing heavily in India. So we’re selectively going after those countries where we can earn a return on the tremendous research-and-development spending that we have to do.

Some Big Pharma firms are shrinking themselves; you just spent some $48 billion to get bigger. Why?

Today we are a $51 billion company, but I think you could be $100 billion as long as you have a division structure that puts a good management team in charge of a particular area and turns them loose.

Why pay all that money for Alcon?

Developing drugs takes a very long time: From discovery all the way to launch could be 10 or 12 years and cost almost $2 billion. Also, there’s a significant unmet need in [the eye-care] sector, as prevalence of eye diseases rise and the elderly population grows. The acquisition makes us the world leader here.

What about the FDA? Is it frustrating trying to get a drug approved?

There’s a new level of predictability since Peggy Hamburg came in as FDA commissioner [in 2009]. So we’re not frustrated, because we understand how to react now to discussions that we have with them, which wasn’t the case just a few years ago.

Why’s that?

Well, historically, the FDA hasn’t been as science-based as some of the other regulatory agencies around the world. The debate has been more political, but now it seems like there’s a very strong science base being brought to decision making. And to me, that’s a positive. [The FDA declined to comment.]

Is there a particular drug that’s the holy grail of pharmaceuticals?

Everybody is trying to develop a break-through in Alzheimer’s, especially because of the aging population and the burden that the disease is going to have, not just on the health system financially but also on families. Unfortunately, the brain is the most complex organ in the body, so there have not been a lot of effective therapies.

What’s your overall goal?

We’re seen as primarily a pharmaceutical company. My mission, over the next five years, is to move Novartis toward being a broad-based health care company.

Read the full article here:
CEO Interview: Novartis’ Joe Jimenez

First, selling late puts an investor in competition with many others who are doing the same thing. That could result in a lower price than they would otherwise get.
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Some researchers believe the January Effect, where stocks that decline in a given year tend to outperform early in the following year, is caused by tax loss harvesting. Shares of poor performers sink lower than they otherwise would due to last-minute tax selling, the thinking goes, and then rise after year’s end.

There’s some dispute over whether the January Effect is as powerful today as it seemed in past decades, and many other factors will affect stock prices in coming months. But all else held equal, it can’t help to wait and sell with the herd.

The second reason to sell now is that most investors hold losers too long, whatever the tax consequences. A basic human tendency called loss aversion makes investors want to ride out a paper loss as long as possible in hopes the stock will turn around, even though the economic benefits of that strategy are dubious.
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Why Investors Should Sell Their Losers Now
5:45

There are 23 trading days left in 2011 — plenty of time to sell losing stocks for tax purposes. But as SmartMoney’s Jack Hough argues on The News Hub, investors shouldn’t wait.

Price momentum matters, after all. If anything, investors should sell losers early and hold winners as long as they can — just the opposite of what studies show most do.

The S&P 500 is sitting about 5% below its starting point for the year, not including dividends, so plenty of investors have losses. The tax benefits available to them are generous: Losses can be used to offset gains. Tax rates for long-term gains are temporarily capped at 15% but short-term gains can be taxed up to the top marginal income tax rate, 35%.

Losses can also be used to offset ordinary income, but only $3,000 per year. Losses not used this year can be carried forward to future years.
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Investors who sell must wait 30 days before re-buying the same security to avoid a so-called wash sale, which forfeits their tax breaks. They may buy a different security right away. Mutual fund holders can exploit the vast number of fund choices to avoid a wash sale — by, for example, selling an S&P 500 index fund and buying a Russell 1000 one.

For stock investors, tax loss harvesting provides as good an opportunity as any to upgrade to better-performing holdings.

Netflix (NFLX: 68.14, -1.98, -2.82%) has lost more than 60% this year. It might not be a bargain at its current price (see “Bottom Fishing: Netflix Vs. H-P”). And there are plenty of good deals to be found among dotcom-focused firms (see “Cloud Investing, Buffett Style”).

Ruby Tuesday (RT: 7.12, -0.26, -3.52%) has lost nearly half of its value this year. It has shrinking same-store sales and pays no dividend. Darden Restaurants (DRI: 41.82, -5.91, -12.38%), owner of the Olive Garden and Red Lobster chains, has produced consistent sales growth of late and its shares pay 3.9%.

Citigroup (C: 29.75, -0.08, -0.27%) and Bank of America (BAC: 5.78, -0.01, -0.17%) have both lost half of their value this year on fears that a Euro-zone debt woes could set off another global financial crisis. Which banks to swap into? Maybe none, if you believe finance in general will revert to its historic, smaller role in the economy (see “Banks Won’t Fail. They’ll Fizzle”).

Instead, take the opportunity to reduce exposure to financials and stock up on financially strong firms in other sectors (see “AAA-Rated Companies With 3% Dividends”). You’ll pay taxes on the extra dividend income you collect, but that’s not such a bad problem to have, and the dividend tax rate is capped at 15% through 2012.

Read the full article here:
Why Investors Should Sell Their Losers Now

Real-estate investment trusts have had strong returns in recent years, and right now they are paying respectable yields.
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The apartment sector has been particularly strong, the result of millions of cash-strapped families deciding to rent instead of buy. David Campbell, a principal at Bingham Osborn & Scarborough in San Francisco, recommends two apartment REIT s: Camden Properties Trust (CPT: 57.08, -0.49, -0.85%), yielding 3.3%, and Avalon Bay Communities (AVB: 122.16, -0.42, -0.34%), yielding 2.9%.

Fidelity Real Estate Income fund, with a yield of 5.1%, and Vanguard REIT ETF (VNQ: 55.47, -0.33, -0.59%), 3.4%, each will give you a diversified basket of REITs.

But when it comes to income, mortgage REITs that invest in mortgage-backed securities issued by Fannie Mae and Freddie Mac may be your best bet. Since their portfolios are guaranteed by the federal government, there’s very little credit risk. So the main risk is that the Fed raises interest rates, and it has told us that won’t happen before 2013. Annaly Capital Management (NLY: 16.28, -0.01, -0.06%) is the biggest in the bunch, with $113 billion in assets and a whopping yield of 14.8%.

Equipment Leasing

When a company leases a piece of heavy equipment, such as an oil tanker or a railroad car, income investors stand to benefit.

Here’s how: Independent firms buy up large quantities of leases with investors’ pooled assets, “and then investors pick up the income stream from these leases,” she says. Current yields are 7% to 8%.

Investors take on the risk of the leases, but Bots ford thinks this risk is small.

“We’re talking about low-tech equipment that doesn’t get obsolete, and 20-year lease cycles,” Bots ford says. Companies leasing the equipment typically have long track records of making their lease payments. The default rate is minimal, and typically there are about 50 leases in an investment pool.

To participate you have to work through brokers or asset managers, whose firms often have access to specific pools, such as those managed by Icon Investments and Cyprus Financial.

The caveat: These lock up investors’ money for five to seven years, so Bots ford recommends keeping the allocation to about 2% of your portfolio.

Immediate Fixed Annuities

Major stock-market declines and wild volatility have increased the appeal of low-cost annuities. One of the most widely recommended types by advisers is the simplest kind: an immediate fixed annuity. You fund this annuity with a lump sum, and it immediately starts paying out a guaranteed income for life — or a term you specify.

Investors get a higher monthly payment than they could if they tried to create their own income stream from their investments. That’s because of annuities’ so-called “mortality credit,” which is the benefit resulting from pooled assets of many investors. “Some investors are going to die early, and since the insurance company isn’t going to have to make their payments, they use them to benefit those still living,” says Steve Horn, head of private wealth at the CFA Institute.

With yields of 6% to 7%, a 65-year-old man in good health can turn a $200,000 annuity into monthly payments of $1,100 for life.

Longevity Insurance

If you knew you were going to live until, say, age 85, planning an income stream would be a lot easier. But what worries many retirees is their longevity risk — the chance that they will live a lot longer than they expect.

That’s why insurers have recently come out with a new kind of annuity called longevity insurance. This is a kind of deferred annuity that you buy early on to secure an annuity stream five to 20 years down the line. At age 65, you can buy one to begin paying at age 85. “This fixes the time — horizon problem and makes planning a lot easier,” Horan says. “These are cost efficient, and they transfer the longevity risk to the insurer,” says Horan.

Solid longevity-insurance providers include New York Life Insurance and Metropolitan Life. Fees are embedded in the annuity calculation, but as with immediate fixed annuities, they are reasonable. Through NY Life, a 60-year-old healthy man who buys a $100,000 longevity insurance contract today can secure a $2,916-per-month annuity that begins at age 80 and pays out for life.

In all, our 11 investments offer solid income at a time when any income is hard to come by. In other words, yes, you can still retire comfortably.
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Reeling in 7% Yields

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Going the Other Way with Corporate Debt

Aunt Sally has a problem. We all do, really, but especially Aunt Sally. Where is she supposed to put her savings?

Interest rates on certificates of deposit are pitiful. Treasury bonds are little better: A five-year Treasury pays 1 percent, and a 10-year about 2 percent. That’s actually losing ground against the cost of living. And inflation-protected Treasury bonds are no longer much use either; inflation-adjusted yields have plummeted.

One area that looks tempting: big, safe, blue-chip stocks like Wal-Mart, Microsoft and Johnson & Johnson. Many have high, secure dividend yields that should rise over time, protecting Sally from inflation. They’re stable, with strong balance sheets, huge cash flows and great franchises. And the stocks are reasonably valued. Even those renowned skeptics at Boston fund firm GMO think a basket of “high quality” blue chips could make you a 50 percent profit over five years…on top of inflation.

Technically, these stocks fit into the mutual fund category known as large-cap value. So should Aunt Sally just buy a large-cap value fund?

Not so fast. Invest in one of these funds and, alongside your reliable Coca-Cola and Chevron stock, you’ll also get something you didn’t count on: bank stocks — lots of them.

The typical large-cap value fund invests nearly 25 percent of its money in financial stocks, says Ryan Leggio, an analyst at Morningstar. Four years ago, just before the crash, it was often as much as 33 percent.

This is pretty outrageous when you think about it. Shortly before the crash, the two biggest investments in Aunt Sally’s large-cap value funds were Bank of America and Citigroup. Others high on the list included Washington Mutual (RIP, d. 2008) and Fannie Mae.

Ah, good times.

Over the past five years, says Morningstar, the typical large-cap value fund has lost about 14 percent as a result. And that’s just half the story. By the market’s lowest point in March 2009, Aunt Sally had lost more than half her initial investment.

What if her value fund hadn’t owned any financials? I ran some numbers using the top non financial holdings in Standard & Door’s 500 value index from five years ago. Net result? Without the financials, Aunt Sally’s fund would be even over the past five years, instead of down 14 percent like the average large-cap value fund. And at the worst point, she would have been down 38 percent instead of 53 percent — so her investment would have been worth about a third more.

However you slice it, holding a quarter or more of your stock portfolio in financial stocks is a big bet on a risky sector. So why do these funds do it? Simple. Just blame box-ticking.

Most mutual funds construct their portfolios by following a chosen index of stocks monitored by a third-party firm. But those firms construct those indexes by using very simple — some would say simplistic — formulas.

Indexing company MSCI, for example, told me it screens for value stocks using just three criteria: The stock needs to be cheap compared with this year’s earnings, with its dividends, and with the stated or “book” value of the company’s assets. Other indexing companies basically do the same thing. If a financial stock looks cheap on these measures, it ends up in the value index. Case closed.

That’s what happened in 2007. Many bank stocks looked really cheap compared with their dividends, earnings and asset values. Then the dividends, earnings and asset values collapsed.

It’s crazy. Banks may or may not be good investments. But they are inherently very different from typical value stocks. They are speculative, volatile and risky. They really belong in the sexier “growth” funds.

One more problem with bank stocks? They all tank at the same time in a crash. Diverse, they’re not. So any large-cap value fund with a big weighting in financials is going to be volatile.

This isn’t just a problem for Aunt Sally; it’s a problem for anyone who wants stock market exposure with some stability. If you wanted to, say, hold some equities in your emergency fund, you’d want an option that was less volatile.

There are more than 300 large-cap value funds out there. But when I asked Morning star’s Leggio for good ones with very low weightings in financials, he could think of only three: Yachtsman fund (5 percent weighting at last count), American Funds’ American Mutual fund (7 percent) and Vanguard Equity Income (10 percent). There is no guarantee they will hold low weightings in financials in the future.

Another alternative is Wisdom-Tree’s Dividends Ex-Financials exchange-traded fund. Wisdom Tree says it groups the stock market into nine sectors, excluding financials, then includes the top dividend-yielding stocks in each sector.

You could try building your own portfolio using exchange-traded funds that track the most stable sectors, such as Big Oil, utilities, pharmaceuticals and consumer staples. Of course, it will track those sectors whether the stocks are cheap or expensive, and it will miss cheap stocks in other sectors.

MSCI says it has constructed “minimum volatility” versions of its indexes, with lower weightings in financials. Will we see some low-cost, low-volatility large-cap value mutual funds in the future? It would be about time.

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Hidden in Your Value Fund: Bank Stocks