Stock investors looking for ways to "de-risk" their portfolio at the peak of the market make a big mistake by simply rushing into bonds, according to Barron's. Instead, they should pursue a multifaceted approach. "It's more about reducing the risks within an asset class, rather than changing the asset mix," as David Lafferty, market strategist at Natixis Global Asset Management, told Barron's. (For more, see also: Is It Time To Lock In Your Stock Gains?)

Among the de-risking suggestions from investment professionals interviewed by Barron's: increase your diversification across countries and regions; put your U.S. stock allocation into higher-quality companies; and choose bonds carefully, since "some of the biggest risks lie in bonds," Barron's warns. (For more, see also: Stocks Face "Nasty Shock" From Fed-Created Bubble.)

Source: Barron's

Foreign Stocks

Even after posting large gains so far in 2017, European and emerging markets stocks offer cheaper valuations and better earnings growth prospects than most U.S. equities, Barron's says. The Oakmark International Investor Fund (OAKIX) and the Baron Emerging Markets Fund (BEXFX) have good records of success in finding undervalued companies that offer long-term growth, according to Barron's. The Oakmark fund has delivered a total return of 36.5% during the past year, placing it in the top 1% of funds in its category, per Morningstar Inc. It also has been in the top 2% in the last three, five and ten-year periods. The Baron fund has a total return of 26.9% during the past year, putting in the top 43% of its category, per Morningstar. It was in the top 4% for the last five-year period.

The Vanguard Total International Stock Index Fund (VGSTX) has delivered a total return of 24.2% over the past year, placing it in the top 33% of its category, per Morningstar. This fund is designed to track the MSCI All-Country World Index Excluding U.S., and Morningstar considers its peer group to be foreign large blended funds.

Higher Quality U.S. Stocks

The Jensen Quality Growth Fund (JENRX) has been upgrading an already high quality in order to reduce risk, Barron's says, adding that portfolio co-manager Eric Schoenstein cites medical device maker Stryker Corp. (SYK) as an underappreciated growth stock. Meanwhile, fund manager Thomas Huber of the T. Rowe Price Dividend Growth Fund (PRDGX) tells Barron's that medical device makers and financial stocks offer relatively cheap valuations along with good growth prospects. (For more, see also: Which Stocks May Outperform in the Next Market Crash.)

The Jensen fund's total return of 20.9% over the past year has lagged both the S&P 500 Index (SPX) and 81% of its peers, according to Morningstar. Longer-term, over the past ten years, it has been in the top 34% of its peer group. The fund from T. Rowe Price, meanwhile, has delivered a total return of 19.6% over the past year, behind 76% of its category, but it is in the top 13% for the last ten-year period, per Morningstar. The Vanguard Dividend Appreciation ETF (VIG) is up 19.4% over the past year and currently yields 1.8%, per Investopedia data.

Beware of Credit Risk

In reaching for yield, bond investors have been loading up on high-yield debt with high credit risk. The problem with that approach, Barron's says, is that high-yield bonds act more like stocks, and thus do not reduce the risk associated with a stock portfolio. Meanwhile, many bond funds have increased their exposure to high-yield debt, according to research by Morningstar cited by Barron's. The bond funds listed in the table above, by contrast, have "gone light on credit risk," per Barron's. Moreover, the MetWest fund has had one of the lowest correlations with stocks over the past decade, Barron's adds.

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