My sister and I have to invest some money. She is extremely concerned about safety. That is, she’s afraid of losing everything. I am also concerned about safety, but I’d like something a little more aggressive. Bottom line is, she needs at least a 7 1/2% return and I need at least 10%. A 10% fund seems pretty conservative. My 401k is in very aggressive funds, and I’ve lost a lot of money in the last year. For this investment, I’d like something safer.
What mutual funds would be good for each of us? Which company (Janus, Fidelity, Schwab, someone else)? Of course I’ll check out the leads with the companies mentioned, but when you contact a company their’s is always the best fund. I’d like some independent, real-life feedback from investing Dopers.
Thanks in advance.
A couple of months ago ConsumerReports did a thing on the best mutual funds. One of the pieces of wisdom that came through there and that I’ve seen other places is that if you’re going to be in it for a while an index fund is generally a great option.
There are several reasons for this:
- You get automatic diversity in your portfolio.
- Because the fund managers do not actively trade index funds, there are fewer tax consequences.
- While you will never do better than the average for the market, you’ll never do worse either, and index funds consistently outperform even high risk funds over the long term.
The Consumer Reports piece had a nice table showing the funds, and what percentage of your money goes into paying for the brokerage overhead versus into your investment. I believe their favorite was Vanguard’s S & P 500 fund. You can probably find the magazine in the library, or buy one from the publisher.
http://www.motleyfool.com has some good information too.
Mutuals are just about my favourite form of investing instrument,and I’m a Registered Retirement Advisor, so I know a little about them. However, the following does NOT constitute investment advice or tax advisement, so caveat emptor.
A 7.5%to <10% rate of return is very possible with mutuals, but as with all things investing-related, be wary of higher returns, as they generally have higher risk related to them.
Index funds, as already mentioned, are an excellent way to outperform the benchmarks over time, and tend to be more diverse than standard funds. Look at the prospectus (Latin for “fucking boring book”) to determine fund concentrations. If a fund is mostly stock (equity), then it’s going to tend to be more volatile over time, compared to a mixed equity/bond/treasuries fund. However, stock funds also can have higher ROI (return on investment). Pick a decently rated one, sink a good chunk of cash in, and check up on how it’s doing every month or so. The problem in my mind with most mutuals is that the majority replicate their holdings-especially in the case of index funds, even though I’m partial to them. What does that mean? That they’ll all tend to have the same underlying securities. Look at the top ten equity funds last year (you can do this pretty easily on Motley Fool) and you’ll see that they’re pretty similar. Then, mutuals become like stock cars-built to the same set of specifications, outfitted with the same options. Performance under those conditions depends on the fund managers, who make the decisions. Check out the fund managers and their bios. They’ll be in the prospectus.
Of course,ultimately what makes a investment opportunity right for you is if it meets your needs. I wouldn’t tell someone ten years off from retiring to put everything into savings bonds, because that won’t hit the investment target.
If you’re looking for the ROI you mentioned in the OP, and are reasonably comfortable with assuming some risk, then choose a indexed mutual with a concentration of blue chips, some fliers like biotech and tech, with a safe cash requirement, say, 20% or so. Above all, if you’re going through a broker, meet with them and explain what’s important to you. Check the fund performance over time and watch it like it’s your money, because you have the interest here, not the broker. It’s your money. Make it sit up and beg.
Avoid any fund that has a sales load. Also, pay close attention to expense ratios, and try to find a fund that keeps it under 1% per year. Over time, a small difference in fund expenses can make a significant difference in your returns. Vanguard funds tend to have very low expense ratios, but there are several other quality fund families with no-load funds and reasonable expenses. Remember that past performance doesn’t guarantee future results. For instance, tech fund might have gotten triple digit returns in 1999, while totally tanking in 2000. If you’re looking for a managed fund, try to get one with stable management over several years. Also check the fund’s performance over 3, 5, and 10 year periods and compare it to benchmarks. Did the fund outperform the S&P 500 over the long term? If not, you might want to look at an index fund or spider (SPY)shares. Did the fund outperform or at least keep pace with other funds in its category? If not, you might want to look at similar funds offered by other mutual fund companies. When you look at a fund’s return in absolute terms, keep in mind the context of those numbers–a tech fund that lost 10% over the past year would easily have outperformed the Nasdaq, while a tech fund that gained 50% in 1999 would have been a serious laggard.
Thanks for the answers so far. I’ll be printing this out when the time is right.
Let me explain our goals. My sister wants the money to generate income. That is, she would like to take $7,500 per year out of it for household expenses, raising my nephew, etc. As some people on the board know (because I bellyache about it all the time, I want to relocate to another state. This means I’ll probably have to quit a very nice job. Although I do not want to touch the principle, I may be forced to. In any case, once I’m relocated and settled I’ll obviously be gainfully employed and will not need something that will generate a safe, steady return. As I mentioned, I’m very aggressive in my 401k and am fully aware of how market fluctuations can affect stock funds; and I’m prepared to weather the storms. On the other hand, my goal is to have my own business. To start this business will require about $200,000 in equipment and training – twice what I have to invest. “What? You want to self-finance your business? Are you mad?” Actually, I think I’ll have a better chance of getting a small business loan if I have some collateral. Why spend my money if I can spend someone else’s? But currently working in the credit industry, bankruptcy is anathema to me. In case I fail (and we all know how many small businesses fail), I want to be able to pay my debts. So I’d like my investment to “make hay while the sun shines”. But having lost so much on the 401k, I’d like something a little safer than funds that historically have posted 33% returns.
Obviously my small business is a whole 'nother topic. I just wanted to state my goals.