Monthly Archives: July 2016

Best Stock Fund and Bond Fund Investment Strategy for 2013

The best investment strategy for 2013 will differ from conventional investment strategy for both stock funds and bond funds. Many investors have fallen in love with their bond fund because it has been their best investment, in terms of performance, for years. It’s time to look beyond 2013 in putting together your best investment portfolio to balance risk vs. return to limit the possibility of significant losses going forward.

Hindsight is of no value in the investment world, and even the best stock fund or bond fund will lose money if the investment environment goes against one or the other asset class. As an investor you need balance, and for the average investor this means you need both kinds of mutual funds in your investment portfolio. Now, you also need to re-think your investment strategy in both cases, because interest rates have been falling for 30 years and have recently hit EXTREME all-time lows.

What this means is that even though bond funds have performed well vs. safe investments and even stock funds – the best investment strategy now is to start limiting your exposure to risk in this asset class. The reason: these funds perform well when rates are falling, and lose money when rates rise. Even the highest quality or best bond funds are subject to this phenomenon called “interest rate risk”. The signature of long term bond funds is interest rate risk.

So, what’s your best investment strategy to get both income and growth in 2013 and beyond and what are the best funds to own? Look for intermediate-term bond funds with investment portfolios where the average maturity is 5 to 7 years vs. 10 to 20 years or longer, to increase you safety factor. You will sacrifice some dividend income, but will greatly reduce interest rate risk. Then, look for the best stock fund investment that will both lower your risk of owning a stock fund while making up for the dividend income you have given up.

What you need to understand is that your bond fund has likely been your best investment in recent times not because it has paid such high dividends – but because it has been going up in value due to falling interest rates in the economy. There are stock funds out there right now that pay higher dividends, and do not have interest rate risk. Your best investment strategy would be to emphasize these funds, since some of the best stock funds pay higher dividends than the average bond fund.

The best investment strategy for 2013 will be to lower your allocation to bonds and funds that invest in them, while also lowering your risk in stocks (growth funds) that pay little if anything in dividends. At the same time, it is always wise to lower your cost of investing in mutual funds of both varieties in order to increase your net return. Now, let’s get more specific in terms of the best bond funds and best stock funds to invest in so we can put our investment strategy in action.

The best investment strategy for bond funds: go with intermediate-term INDEX FUNDS with NO sales charges and low yearly expenses. This can save you 3% or more upfront and about 1% a year for expenses. This is significant when you consider that you can’t earn 1% a year on most safe investments, and most bond funds won’t be paying dividends of even 3% in 2013. Plus, longer term funds have significant downside risk called interest rate risk.

The best investment strategy for stock funds: Go with stock INDEX funds that invest in large companies that pay higher than average dividends. Consider real estate equity funds as well for even higher dividend yields. If you include both in your investment portfolio, and go with no-load funds to avoid sales charges and lower your yearly expenses, you could net an average of 3% or more in dividends. Plus, these funds have less downside risk than growth funds that don’t pay significant dividends.

The best investment strategy for 2013 will provide you with a relatively attractive dividend income – while lowering your risk in both your stock fund and bond fund investments.