Avoid Motion Sickness With These Investments
Andrew Leckey

Most investors want to avoid motion sickness.

Even if the final results could be the same, arriving at those results on a smooth road with few bumps is preferable to veering up and down like a roller coaster.

Yet those same investors also have some difficulty shaking off a commonly held belief that volatility leads to investment success while smoother vehicles will probably take them nowhere.

"There really isn't any evidence I've seen that says lower-volatility funds will significantly lag their higher-volatility peers over the long run," said Ryan Leggio, mutual fund analyst with Morningstar Inc. in Chicago.

Investors should look at mutual funds that have a consistent strategy of owning cheap, high-quality companies with little debt, reliable earnings and high profit margins, Leggio said. Those funds fared best during this bear market and also in the long run, he said, because their consistent strategy often leads to more reliable performance.

"The less-volatile investments are definitely the high-quality, blue-chip dividend-paying stocks that are purchased when they offer good value," said Kelley Wright, managing editor of the Investment Quality Trends newsletter in Carlsbad, Calif., noting that a low price with a high yield provides great value, as well as potential for that price to rise in the future.

Wright prefers companies whose stock has sufficient liquidity for ease in buying and selling and whose debt load "isn't an albatross hung around their necks." Too much debt means more of a company's earnings must be applied to servicing that debt rather than areas that improve the bottom line, such as research and development.

It makes sense to be careful these days.

"Investors tend to underestimate volatility," observed Ron DeLegge, editor of ETFguide.com in San Diego. "For example, they underestimated volatility in financial stocks in 2008 and in technology stocks in 2002 because they were looking to history as the guide to the future."

Investors blind to the potential downside were taken by surprise when dot.com stocks crashed and when big financial stocks cut or eliminated dividends, he said. Such dramatic possibilities weren't in their memory bank.

Yet no one should expect miracles either, since even those investments operate in the real world.

"One mistake investors make is assuming that because a fund is less volatile it won't ever lose any money, or that it will lose very little money, in a market downturn," said Leggio, pointing out that a number of the less-volatile funds are fully invested in stocks. "Another mistake is selling whenever a fund is dropping in value because your expectations have been too high, since those dips could present buying opportunities."

Jensen Fund (JENSX) is a high-quality fund recommended by Leggio that owns fewer than 40 companies and has large holdings of stocks such as Johnson & Johnson, Procter & Gamble and Coca-Cola Co.. It seeks companies with steady revenues and clean balance sheets.

Vanguard Dividend Appreciation Index Fund (VDAIX) and its exchange-traded sibling Vanguard Dividend Appreciation ETF (VIG) focus on companies with consistent dividends, while Amana Trust Growth Fund (AMAGX) is a well-run fund that doesn't invest in companies with debt worries. Leggio recommends all three.

In international funds, Leggio suggests First Eagle Overseas "A" (SGOVX) and Tweedy, Browne Global Value Fund (TBGVX). Both have long-tenured managers, value strategies and competitive fees. They find dependable foreign stocks.

AIM Charter "A" (CHTRX) boasts respected manager Ron Sloan, who openly tells his investors he won't do as well as rivals in market upturns but will do a lot better in downturns. An accomplished risk-avoider, Sloan sidestepped last year's debacle in financials. Despite holding a considerable amount in cash, in the recent market upswing he has kept pace with the Standard & Poor's 500, said Leggio.

The well-known Sequoia Fund (SEQUX) is a dependable choice that always holds some cash -- currently a significant 20 percent of its portfolio. It holds 29 stock names, led by Berkshire Hathaway Inc.

"Investors should look at which asset classes tend to be less volatile and an easy way to do this is through ETFs," said DeLegge. "If you want to dial down the risk, look at asset classes or areas with lower volatility."

Though they've underperformed this year, utilities and health care are such sectors considered "safe havens" and steadier than many other groups even in recession.

Utilities Select Sector SPDR (XLU) and Health Care Select Sector SPDR (XLV) are ETFs recommended by DeLegge. Another "stodgy and dull" sector admired for its lack of excitement is the industrials, with Industrial Select Sector SPDR (XLI) DeLegge's ETF choice there.

For investors who wish to avoid a bad case of nerves, Wright recommends dividend-paying stocks.

In pharmaceuticals, Abbott Laboratories (ABT) is a bargain with a dividend yield over 3 percent, Wright said. Telecommunications giant AT&T Inc. (T), yielding around 6.5 percent, offers good value even when the dividend is lower than that.

Beverage leader Coca-Cola Co. (KO) is an outstanding value that features a yield of about 3.5 percent yield, Wright said, while Colgate-Palmolive Co. (CL) is a quality, easily understood business likely to be around for a long time. It has a yield of around 2.5 percent.

No one can promise an investment ride with no bumps, or with investments that will never go down in value. But with careful planning you can improve your odds.