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Had you bought Vanguard Total Stock Market (VTSMX) on March 31, 2020, you’d be up 86% through July 13, 2021. Not too shabby.

That’s a great return, but it tells the contrarian in me that maybe it’s a good time to look for lower-risk funds. Not because I think a bear market will start next week or next month, but I know that when valuations rise, so do the risks.

To get some ideas, I screened for funds with Morningstar Analyst Ratings of Silver or Gold and Morningstar Risk ratings of Low. The risk ratings are relative to a fund’s Morningstar Category, so in isolation they don’t tell you that a fund has a low chance of losing money. Rather, they tell you that a fund has had less downside volatility in the past three-, five-, and 10-year periods than its peers. Any mutual fund can lose money, and, of course, a technology or emerging-markets fund with a Low risk rating could lose a lot of money.

That’s why my next step was to rank by standard deviation. That tells you how volatile a fund has been the past three years. It’s not perfect: Some risks like credit risk can drive down volatility, though most risks lead to higher standard deviation. So, let’s look at the four funds with lowest standard deviations, Gold or Silver Analyst Ratings, and Low risk ratings.

Vanguard Short-Term Inflation-Protected Securities Index (VTAPX) clocks in with a standard deviation of 1.78. Now that’s a boring and fairly stable fund. Though some of it appears to be a temporary result of the recovery, inflation is on the rise, so it’s probably a good time to look at a fund like this. Launched in 2012, the fund’s biggest one-year loss was 1.54%, and its biggest gain was 4.97%. The fund owns Treasury Inflation-Protected Securities, which adjust their prices based on inflation. Thus, they provide some inflation protection that’s welcome in times like this. The short-term duration means that the fund also has low interest-rate risk.

Pimco Mortgage Opportunities and Bond (PMZAX) is a step up in risk with a standard deviation of 3.44. It takes some credit risk but tends to keep interest-rate risk muted. The fund aims for mid-single-digit returns and has largely pulled it off. Launched in 2012, its worst return was a 1.15% gain in 2018 and its top return was a 5.08% gain in 2017. The mortgage focus may sound safe, but it does have nonagency mortgages, which are riskier. Still, Dan Hyman and team have managed those risks well.

Fidelity Freedom Index Income (FIKFX) is meant to serve as a source of income in retirement. It has a modest 4.06 standard deviation, reflecting the benefits of diversification and low costs. The fund owns 18% of assets in stocks with the rest in bonds and cash. In 2018, it lost 0.77%–its worst calendar-year performance. In 2019, it gained 10.59%. The fund has wide-ranging broad-market indexes spanning bonds, foreign stocks, and U.S. stocks.

American Funds Income Fund of America (AMECX) is yet another move up the risk/reward curve, but it’s still on the tame side for an allocation fund that owns mostly equities. Its standard deviation is 11.99. The fund is in our allocation–70% to 85% equity category. It lost 5.11% in 2018 but gained 18.93% the next year. The fund has a deep team of managers running income-oriented sleeves of equities and a separate team of managers running the bond portfolio. Stocks must have a forward dividend yield of at least 3%. That is a reasonable target that provides income without pushing the portfolio into financially shaky companies.

Be sure to read the full analysis on these funds to get a fuller understanding of the risks.

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