2013 Was a Tough Year to Go Without Stocks

This has been a year to own stocks, stocks and more stocks. Every category is solidly in the green, and some of the indexes, such as the Russell 2000, which tracks small-company stocks, are up more than 30% so far in 2013. Even utilities, normally a lost cause in bull markets, have gained 14%, including dividends. (All returns are through November 22.)

So the results from Tofurky, our annual exercise in cooking up a Thanksgiving recipe that can deliver stocklike returns without owning any common shares, do not exactly lift the holiday spirits of the conceit’s aficionados. In prior years, this bond- and energy-heavy portfolio, which we invented when stocks were toast in the late 2000s, was able to produce strong returns even when ordinary shares were generating double-digit profits. In 2012, for example, Tofurky turned $1 into $1.10, with ten of the 12 selections producing a gain, while Standard & Poor’s 500-stock index returned 16%.

This year, though, our Tofurky, named after a meat-free concoction made of soy and tofu, hasn’t been quite as tasty. The 11 ingredients of our, uh, feast combined to return a mere 5.8%. Hardly a disaster, but pretty paltry compared with the S&P 500’s 29.0% gain.It helped a lot that we eschewed such big losers as gold, long-term Treasury bonds and real estate investment trusts that buy mortgages. On the plus side, we wisely divided 20% of the total between two successful energy partnerships, Magellan Midstream Partners (symbol MMP), with a 48.5% return this year, and Vanguard Natural Resources (VNR), which gained 19.6%. Two Fidelity income funds also added positive returns. Fidelity Capital & Income (FAGIX), a junk bond fund, returned 7.9%, and Fidelity Floating Rate High Income (FFRHX), a bank-loan portfolio, was up 3.5%. (]All recommendations in boldface are keepers.])

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Unfortunately, our allocations to long-term corporate and municipal bonds and preferred stocks did not pay off, nor did foreign bonds. A 5% position in cash earned nothing, but that was better than the small loss suffered by our 10% allocation to Vanguard GNMA (VFIIX), which lost 1.4%

You can view our performance in one of two ways. One is that plus 5.8% is forgettable because it came during one of stocks’ best years in recent times. The opposite view is that plus 5.8% is excellent in light of the puny returns on money market funds and CDs and all those aforementioned torpedoes we evaded.

Either way, we’re not going to drop this tradition from the Kiplinger menu. So what goes into the mix for 2014? Honestly, we don’t have to trash anything from the 2013 plate (Click here to see last year's recipe). I’m tweaking the allocation to domestic bonds by replacing the 10% of the portfolio in DWS Municipal Income (KTF), a leveraged closed-end tax-free bond fund, with Baird Core Plus Bond (BCOSX), a steady intermediate-term bond fund that yields 2.8% courtesy of a portfolio of high quality government and corporate bonds. And I’m trimming the 15% allocation to iShares U.S. Preferred Stock ETF (PFF), an exchange-traded fund, to 10% and filling the 5% hole with Fidelity International Real Estate (FIREX), which owns REITs in Australia, Europe, Japan and Latin America. (We consider REITs, master limited partnerships, and preferred stocks to be eligible for Tofurky; only common stocks aren’t kosher.)

Here’s the breakdown for the latest incarnation of Tofurky:

Domestic bonds, 30%: Divided equally among Baird Core Bond and two holdovers, Fidelity Capital & Income and iShares iBoxx Investment Grade Corporate Bond ETF (LQD).

Energy, 20%: Can’t complain about Magellan Midstream or Vanguard Natural Resources (which, by the way, isn’t related to the Vanguard mutual fund company). The first is a pipeline and storage enterprise, and the second emphasizes exploration and production.

Preferred stocks, 10%: There are good deals in preferreds now, and we expect better results from iShares S&P U.S. Preferred Stock ETF (PFF). You may be better off shopping for some individual issues that trade below the $25 par value, but this ETF is the easiest way to get exposure to preferred stocks.

Foreign bonds, 10%: Fidelity New Markets Income (FNMIX) covers emerging-markets debt, while T. Rowe Price International Bond (RPIBX) ably roams the bond markets in the developed world outside the U.S.

Bank loans, 10%: Fidelity Floating Rate High Income is the dean of this category, although it now has no-load company from DoubleLine and T. Rowe Price. We like DoubleLine in general, so we’ll now divide the 10% in half between the Fidelity fund and DoubleLine Floating Rate (DLFRX).

Mortgages, 10%: Vanguard GNMA is a keeper for 2014 and probably well beyond.

Real estate, 5%: As mentioned earlier, I’m introducing overseas property with Fidelity International Real Estate.

Cash, 5%: I’m fine with throwing this into an online savings account that pays close to 1%, a series of three-month CDs, or a money market fund, but cash is here as ballast or as a reserve if you spot an opportunity.

There you have it. I truly don’t want this assortment to outperform a normal array of stocks and bonds because we’re all happier when our regular investments prosper. But if you’re really, really convinced that stocks can’t kick it again in 2014, print this page and think about how you can tweak Tofurky to make it more palatable for your own tastes. I suggest you combine it with a cold, crisp Pacific Northwest Riesling. And the happiest of holidays to all Kiplinger readers and their families.