Positioning For A Stock Market Recovery

He's also putting some money into the Vanguard Short-Term Investment Grade Fund (VFSTX). "It has government and corporate bonds," said Courtney. "At some point, when the market begins to recover, people are going to start coming out of Treasury bonds. We like this fund as a means to keep our government bond positions as short term as possible to negate the impact of any eventual reversal in cycles."

And corporate bonds in a short-term fixed-income portfolio help to boost overall yields for a portfolio, he added.

With stocks, typically smaller companies and stocks oriented more toward value segments of the market lead the way, notes Courtney. "All stocks look pretty cheap right now," he said. "But since we're positioning our portfolios for a time when market cycles change and stocks rebound, our portfolios are sticking with funds investing in traditional value companies, which are more economically sensitive."

He likes right now the DFA U.S. Small Cap Value Fund (DFSVX). It had lost more than 40% so far this year entering Tuesday. "It has taken a bigger hit this year than a lot of small-cap value funds. But that's one of the reasons why we like it," said Courtney.

Over longer periods of time, it has outperformed. "And it has done that by really targeting the smallest and most value-oriented companies in the market—even more so than a fund tracking the Russell 2000 Value Index," said Courtney. "We saw the same thing in 2000-2002. DFSVX fell more during that recession, but it outperformed by nearly 50% once the market cycle reversed and stocks rebounded."

Smaller companies have more difficulties raising money these days as the global credit crunch continues, he says. "When you start to see borrowing costs go down, which is starting to happen right now, these smaller companies will start to benefit," said Courtney. "Those smaller companies are on the front lines of any recovery that's bound to take place."

He also believes international markets will show the same patterns at some point. As such, Burns Advisory Group's client portfolios are investing in the DFA International Vector Equity Fund (DFVQX).

"We're keeping a neutral weighting in large companies, simply because we want to be ready for a recovery and position our portfolios to be slightly overweight in small-cap stocks," said Courtney.

For large-caps, he's using DFA U.S. Large Cap Value Fund (DFLVX) and the DFA U.S. Large Company Fund (DFLCX). Courtney also likes to keep some exposure to mid-caps through the Vanguard Mid-Cap ETF (NYSE: VOE).

As further diversification tools, he also maintains positions in the DFA Global Real Estate Securities Fund (DFGEX). "It has roughly half of its securities in the U.S. and the other half invested in international markets," said Courtney. "We feel that overseas REITs is a burgeoning new market. More companies are starting to accept the REIT structure as we've seen in the U.S. for years."

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