Declare Your Independence From the Stock Market

by Richard Band | November 20, 2011 8:00 am

american flag[1]Stocks, as measured by the Standard & Poor’s 500 index, doubled from the low in March 2009 to the peak (so far) of the current cycle last April. But then, from April 29 to Oct. 2 this year, the market gave back 38% of its gain. Prices fell almost twice as fast, per trading day, as they rose!

Small wonder so many investors’ portfolios seem stuck in a rut. If you buy stocks (or mutual funds) a little too far off the lows, the next market pullback can quickly throw you for a loss.

There’s a way to escape this frustration — or at least mitigate it. Declare your independence from the stock market. I don’t mean you should dump all your stocks. Instead, build a position in various assets that don’t need a rising stock market to grow. I call these investments “all-terrain vehicles,” because they’re capable of climbing over tough economic ground.

Here are two ATVs that look attractive right now:

Managed Futures

Commodity traders have known a little secret for a long time. Selling futures contracts short can be just as profitable as buying. The great traders — George Soros, Paul Tudor Jones, John W. Henry and others — have reaped spectacular gains by betting that individual markets (stocks, currencies, oil, etc.) would go down, rather than up.

This flexibility can prove especially handy in years like 2008, when deflationary fears drove most asset prices into the ground. As you recall, the S&P 500 Index, with dividends reinvested, plunged 37% in that woebegone year. Over the same period, the Credit Suisse/Tremont Managed Futures Index jumped 18.3%. That’s real diversification!

Many of the best of managed-futures funds are available only to investors who meet certain standards for net worth (typically at least $250,000), or income and net worth combined. If you’re interested in exploring this universe, speak with Bob Condon or Jerry Kohn at Foundation Investment Group in Berkeley, Calif. Bob and Jerry keep an extensive database of futures funds, including some with initial minimums as low as $10,000.

Over the past year or so, several mutual funds have also been launched that invest in managed futures. I’m generally cautious about newly organized funds — no track record to analyze. However, one fund appears to be making good headway, with fairly low volatility.

Since last December, through Sept. 30, the MutualHedge Frontier Legends C Shares (MUTF:MHFCX[2]) — which carry no up-front sales charge — have returned 7.8%. Over the same stretch, the S&P 500 was down 2.6%. So the fund is definitely living up to our all-terrain specs.

Private-Market Real Estate

My other all-terrain vehicle is commercial real estate. Not publicly traded REITs, however. When the stock market suffers a panic attack, real estate investment trusts tumble with the rest of the merchandise. Indeed, sometimes publicly traded REITs can fall harder — and stay down longer — than the broader equity market.

You’ll find a safer haven in certain non-publicly traded REITs, such as CPA:17 – Global. CPA:17 owns mostly offices, retail stores, warehouses and light industrial properties, which it leases to creditworthy tenants on a “triple net” basis — the tenant is responsible for most variable expenses, including taxes, insurance and upkeep.

Founded in 1973, W.P. Carey & Co., sponsor of the CPA programs, has compiled a superb long-term record, thanks to careful selection of tenants and prudent use of debt. An interesting feature of CPA:17 is that about a third of the REIT’s rents come from Europe.

Five to seven years from now, I suspect, the European economy will have greatly improved, rents will have surged and the properties Carey is gobbling up now will have appreciated handsomely. In any event, I’m confident these folks will keep your money safe and growing, regardless of what happens on Wall Street. Current yield: 6.5%.

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