The best mutual funds for 2010 and the best investment strategy for 2010 and beyond may not be the same mutual funds or investment strategy that worked in 2009. Here are some adjustments to consider in mutual funds and investment strategy going forward.
In considering in the best mutual funds to invest in and the best investment strategy for 2010 and beyond remember this: what shook the nation and the investment world in 2008 was not just another recession. It was a financial crisis. The economy improved and stock prices went up in 2009 through early 2010, but are our troubles behind us?
BEST MUTUAL FUNDS, STOCK CATEGORY… Be less concerned with the best mutual funds here and more concerned with how much money you have allocated to stocks in general. Your best investment strategy for 2010 and going forward: lighten up; don’t load up on stock funds. Don’t chase a market that has gone up 70% in little over a year. The large institutional investors have bid prices up, for at least two basic reasons. First, stock prices had fallen almost 60% by early March of 2009 and were over-sold (cheap). Second, big money managers had few other attractive alternatives with low interest rates making both bonds and money market securities less than attractive. Hence, the best investment strategy they could come up with for most of their money was to wade into the stock market.
Stay away from the more volatile and riskier stock funds that invest either domestically or abroad. Debt problems are in the spotlight in several areas of Europe, and there is fear that this contagion could spread. Emphasize high-quality stock funds of the large-cap equity-income variety that pay a respectable dividend in your portfolio. In the international stock fund area, go with high quality as well. One exception to avoiding volatility is that you may want to include some specialty stock funds, or those that invest contrary to the norm in your portfolio: like gold, real estate, natural resources funds or funds with a “contra” approach to investing. This will give you added diversification.
BEST MUTUAL FUNDS, BOND CATEGORY… The average investor in recent times has bought into bond funds in search of higher income and more safety than stock funds offer. Few seem to realize that this can be a risky proposition in today’s economy and interest rate environment. The best investment strategy for 2010 and into the future: avoid long term bonds and bond funds with average maturities of 10 years or more (that invest in longer term bonds). Interest rate risk is high, which simply means that when interest rates go up these bonds and funds will fall significantly in price (value). Bond funds with average maturities closer to 5 years will pay a reasonably attractive income with a whole lot less interest rate risk.
BEST MUTUAL FUNDS, MONEY MARKET CATEGORY… Money markets and the funds that invest there are paying next to nothing, but at least these are among the safest investments in the world. The best investment strategy for 2010 is NOT TO AVOID these funds. This interest rate situation is highly unusual and can not continue indefinitely. Our government has purposely moved to keep money market (short-term) rates low to stimulate growth in the economy. The problem is that with these rates near zero, what do they do to stimulate the economy the next time we see recession or worse? What happens when the rest of the world is no longer eager to buy our Treasury securities at historically low interest yields to finance our debt? Interest rates will go up, and so will money market fund yields.
The best mutual funds for 2010 in the money market category could be the tax-free versions, especially for those in higher tax brackets. Some of them are actually paying more than their taxable counterparts. Money market funds pay interest in the form of dividends, do not fluctuate in value, and are by far the safest of all fund categories. These funds do not have sales charges, but investors do pay for yearly expenses. Check and compare the expense ratios and yields before deciding on a money market fund.
BEST MUTUAL FUNDS, STOCK and BOND CATEGORIES… There is one best investment strategy for 2010 and beyond that can only work for you as an investor, and never fails to increase your profits and returns in mutual fund investing. The best mutual funds keep the cost of investing low. No-load funds have no sales charges and some of them have lower than average yearly expenses. Sales charges, expenses and fees come out of your pocket and only work against you. The very lowest cost of investing can be found in no-load index funds of both the stock and bond variety. Lower your cost of investing as part of your overall investment strategy.