5 strategies for a new bear market

If the last couple of weeks have left you unsettled, it’s no wonder. The tactics used by these mutual funds can help you defend your wealth against a falling market.

In what seemed like the blink of an eye, the stock market's spring swoon mutated into a summer surge. Then, just as quickly, the rally gave way to a huge sell-off. Clearly, investors are unsettled and uncertain about the future -- with good reason.

Risks abound: Joblessness remains disconcertingly high, and economies in the U.S. and much of the developed world are fragile. Notwithstanding the latest bailout of Greece, investors worry that that nation, as well as the bigger countries of Italy and Spain and even the U.S., could default on their debts.

Timing the stock market is notoriously hard, and we don't encourage you to try to. But if the market's gyrations leave you queasy, you may want to go on the defensive. Fortunately, plenty of mutual funds, employing a wide array of strategies, let you do just that.

Here are five approaches to protecting your portfolio, listed in order of increasing complexity.

Some plain, old-fashioned stock funds have proven records of outpacing their brethren in tough times. They do this by picking stocks that tend to hold up well in down markets, raising some cash when they have trouble finding bargain-priced stocks (but not enough to be considered market timers), or some combination of the two. The problem with these kinds of funds is that they will almost always suffer at least a bit in periods of stress, and because every bear market is different, they may not do as well in future downturns as they have in the past.


Launched in 1970, Sequoia Fund (SEQUX) has compiled a distinguished record, first under Richard Cunniff and William Ruane, disciples of value-investing guru Benjamin Graham, and more recently under Robert Goldfarb and David Poppe. The fund invests in large, predictable businesses that have a lot of cash on their balance sheets but not much debt -- and thus can weather tough economic times. In addition, the managers let the fund's cash position expand when they have trouble finding attractive opportunities -- at last report, 21% of Sequoia's assets were in cash.

Over the past 10 years, Sequoia returned an annualized 6.1%, topping Standard & Poor's 500 Index ($INX) by an average of 3.4 percentage points per year (all returns are through June 30). The fund shone especially brightly during the two big bear markets of the '00s. In 2008, it lost 27%, 10 points less than the S&P 500's decline; in 2002, when the index sank 22.1%, Sequoia dropped only 2.6%. Looking at Sequoia another way, it captured 77% of the monthly increases in the S&P 500 from Jan. 1, 2000, through June 30, 2011, but shared in only 48% of the index's declines.


DGHM All-Cap Value Investor (DGHMX) differs from Sequoia in three notable ways: It's only four years old, it's practically unknown, and it stays fully invested at all times. The fund stood out during the 2008 market conflagration, dropping a relatively modest 22.4% that year. And private accounts run by fund sponsor Dalton, Greiner, Hartman, Maher held up well during the 2000-02 bear market. The accounts, which employ the same bargain-hunting strategy as the fund, essentially matched the S&P 500's 22.1% decline in 2002 but earned double-digit gains in both 2000 and 2001, down years for the market.

DGHM invests mainly in high-quality, undervalued companies that are leaders in their industries and generate strong free cash flow (the cash profits left after the capital outlays needed to maintain a business). The mutual fund is run by 10 analysts, each of whom is responsible for a sector. One of the fund's earliest and best-performing holdings is Teradata (TDC, news), a digital storage company whose stock has more than doubled since September 2007.

Balanced funds can cut your stock losses through a simple maneuver: They hold less in stocks. The typical balanced fund invests about two-thirds of its assets in stocks and the rest in bonds. Vanguard Wellington (VWELX), one of the oldest and cheapest balanced funds (annual expense ratio: 0.30%), benefits from an extra dose of an all-too-rare ingredient: common sense. At least a year before mortgage securities started to implode in 2007, co-manager Edward Bousa began selling shares of banks that had stockpiled them.

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