My Personal Finance Blog

If you want to invest money for a better future and don’t want to constantly monitor your money, 2011 is as good a time as ever to invest money in funds. In fact, mutual funds offer most people the best investment options out there because they do the day-to-day money management for you. In the simplest of terms, here are some tips to help you invest money and find the best funds to keep yourself out of trouble in 2011 and beyond.

Keep in mind that you don’t invest in mutual funds to speculate in stocks and bonds. You invest in them because funds were designed as a way for millions of average folks to get a piece of the action in stocks and bonds with professional money managers making the investment decisions. Your job is to simply decide how much money to invest in each of the 3 basic types of funds, and then to pick the best investment options or funds in each area to fit your risk profile. Here are some tips, because 2011 and beyond could be a little tricky.

In order to really make your money grow over the years you need to invest in stocks. The average person’s best investment options in this department are equity (stock) funds. Equity funds range from aggressive growth funds that pay zip in dividends but can go up like a rocket in good economic times… to blue-chip equity-income funds that invest your money in large corporations that pay steady dividends with milder fluctuations in stock price. Since the higher a stock (fund) price soars the harder it falls, for 2011 and beyond I’d invest my stock money with the more conservative equity-income funds. It’s nice to get a 2% or 3% yearly dividend when you can hardly find 1% at the bank.

The second basic type of mutual funds is bond funds, and for 98% of the people they represent the best investment options for putting money into bonds. Millions of Americans invest money in bond funds, but few understand bonds, which is what these funds invest your money in. Here we keep it simple and go to the bottom line. If you want details, I’ve got a number of bond articles that go there. Simply said, you should invest money in bonds (funds) because they pay higher interest income than you can get elsewhere, and tend to balance out your overall investment portfolio.

Traditionally, bond funds can offset some losses from stock investments because they have often tended to be one of the best investment options when stocks were out of favor and in the dumps. In the bond department you can be aggressive or more conservative as well. For 2011 and beyond I would suggest you go conservative again because our economy and interest rate situation are precarious at best. Interest rates are near record lows and have been falling since the early 1980s. The economy is still struggling to grow with high unemployment.

What this means to you when you invest money in bond funds: when interest rates head back UP, SOME bond funds won’t be your best investment options. But remember, you need to invest money and keep it invested for the longer-term. You are not trying to speculate, but still need some money in these funds for balance. Your best investment in the bond department for 2011 and beyond: intermediate-term bond funds vs. long-term funds. The latter are too risky and will get burnt when interest rates go back up.

That takes us to the third and last of the basic investment options for funds and investing in general. Money market funds are very safe investments and pay interest income based on prevailing interest rates, which were historically low heading into 2011. Don’t avoid these safe investments because they have one redeeming characteristic other than safety: when rates go back up the interest they will pay will automatically follow suit.

So, yes you should invest money in mutual funds, now and in the future. The year 2011 will present challenges, but where else can you invest in stocks and bonds with professional money management working for you at a modest cost? Your objective should be to invest money and make the best of it. Your best investment options as an average investor haven’t basically changed much in over the past 40 or so years. You just need to focus on where to invest your money in funds so you can stay out of serious trouble when times are rough. Over the longer term, that’s the best you can do as an investor.

For most people the best investments for 2011 will be in the form of the best bond funds and stock funds from the best fund companies in America. Here’s where we go all the way and explain these best investments and why they are getting even better in 2011. Then, we get specific about the best funds and name two fund companies.

Mutual funds were designed with one primary objective in mind: to be the best investments for average folks who wanted to share the wealth produced by stocks and bonds. In 2011 and beyond the best of these funds will still be your best investments and they will offer both diversification and professional management at low cost to you as an investor. All fund companies offer average investors a small piece of a large diversified stock or bond portfolio – easy to invest in and easy to cash in – usually at a reasonable cost.

The biggest and best fund companies offer well over 100 funds to choose from; and some of their very best funds will cost very little to invest in for 2011 and beyond. Due to heavy competition between fund companies, things have gotten even better for average investors. Well, at least for those who know where to find the best investments, funds and fund companies.

For 40 years I’ve followed the fund companies in search of the best investments. My 4 criteria: quality and variety of funds offered, performance, service to customers, and the cost of investing. I’ve found that dozens of the larger fund companies can make claims and boast about being the best in the first 3 areas. But try as they may, fund companies can’t hide the investor’s cost of investing – which has increased for many funds. The good news for today’s investors is that the two biggest fund companies in America will be competing like crazy for your business in 2011 and beyond with a low cost of investing; especially in what I consider to be their best funds, your best investments.

Before I get specific and name names, imagine being a financial planner (like I was for 20 years) competing as follows. In the best investments in stock funds I could offer my clients with $10,000 to invest: $500 comes off the top to pay for sales charges and my commission; and about $150 of your money goes for management and other expenses EACH YEAR. Now compare this to the cost of buying and owning the best funds from the biggest (and in my opinion best) fund companies in America in 2011: Vanguard and Fidelity. The total cost to buy is zero, because there are no sales charges. Yearly expenses can be about $50 for a $10,000 investment, sometimes less than HALF that.

The best investments in both bond and stock funds for most people are INDEX FUNDS. I call them the best funds because they really don’t have bad years relative to the competition, and they have the lowest costs. Index funds simply invest in line with their benchmark – an index. They don’t waste big bucks trying to do what few funds have ever done: beat the indexes consistently. Fidelity and Vanguard both offer stock and bond index funds and pass the savings on to you. Here are the best they offer for 2011 and beyond.

The best investments in bond funds for 2011 are short-term and intermediate-term bond index funds vs. long-term funds. The latter pay higher interest income, but are subject to much greater losses if interest rates turn around and head north during the year. The best investments in stock funds for 2011 are stock index funds with the number 500 in their name, referring to the S&P 500 Stock Index. These funds invest your money in 500 or so of the largest and best-known companies in America. This includes Exxon, Apple, Microsoft and General Electric as their largest holdings going into 2011.

So, there you have the whole package. The best fund companies offering the best investments for 2011 in the form of the best funds they offer… all in 500 words, or more. Plus, now you know how to save $500 up front the next time you invest $10,000 in mutual funds.

The main objective of investing is to grow wealth.

There are many forms of investments: It ranges from the plain vanilla deposits (savings accounts, fixed deposits, insurance, endowments, CPF, SRS) to stocks, bonds, T-bills, unit trusts, ETFs, real estate; for some more adventurous hedge funds, derivatives (options, warrants, futures), forex, and even to the more unique like art, watches, wine and physical commodities.

This list is definitely not exhaustive, but it illustrates the importance of portfolio management towards investing.

Therefore, the important first, and often neglected, step towards investing is developing an investment policy.

Investment Policy Statement (IPS)

It should contain the following:

Purpose: What is the money intended for? Time horizon: When will the money be needed? Risk – Return expectation: What is your risk appetite? Benchmark: What is the performance going to be reviewed against? Any other unique considerations? Like tax considerations, legal constrains, religious restrictions, unique preferences, etc.

Having an IPS commits to memory the financial goal of the investment, provides a road map, moderates the expectations, instills discipline for a long term approach and provides a scale to monitor performance.

The next step is to determine the asset allocation that will best suit the IPS requirements.

Asset Allocation

A common theoretical method used to plan is the modeling concept of using historical returns to determine the assets risk based on its statistical deviation and correlation to other assets.

The justification is that different asset classes performance varies relative to each other, correlation is a measure of that difference. It is difficult to time which asset is going to perform the best, therefore, diversification taking correlation into consideration, reduces overall risk given a level of expected return. Sometimes adding a risky asset like commodities into a portfolio of stocks/bonds might increase returns and in fact reduce the risk because the correlation of commodities to stocks/bonds is low.

Diversification not only takes on the form of asset classes but geographical (International, Regional) as well.

According to research, asset allocation determines 90% of the returns achieved for a portfolio as compared to individual security selection and timing.

Next is to consider the investment strategy.

Strategies

The 2 main types are passive and active strategies.
Passive strategies involve an approach aimed at minimizing transaction costs. Active strategies involve attempting on market timing to maximize returns.

For most small retail investors, the passive strategy would be recommended because the opportunity cost in terms of time spent to beat the market in addition to hefty transaction costs will result in lower returns.

The common passive approach uses a buy and hold strategy as well as dollar cost averaging.

Next is the actual selection.

Security Selection

Individual asset classes has various methods and models of analysis.

Top-down approach of economic, industry and company analysis Dividend Discount Model, Capital Asset Pricing Model, Risk Premium Financial statement analysis using key financial ratios Technical analysis, contrarian, smart money trends Cost recovery, similar transaction comparison, return of income approach Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index

Finally, to close the loop for the process, is the continuous monitoring and re-balancing.

Performance Measurement

The benchmark in the IPS will used to gauge the performance of the portfolio and determine if any adjustments are needed.

The IPS will also need to be reviewed in regards to changes in the market conditions and personal circumstances.

Investing helps to meet future financial objectives, learning about investing improves the chances.

Investing money in funds is the best way to go for about 98% of the people for 2011 and beyond. But you might be missing the boat by not investing money in the best funds. There are traditional funds and a newer breed on the investing scene that could be the best type of funds for you. Here are your choices.

All funds offer simplified investing for average folks who don’t want to get involved with everyday money management and investing decisions like picking stocks and bonds for their portfolio. That’s what fund companies do in the form of bond, stock, and money market funds. Before you beat your head against the wall in search of the best funds for 2011 in the three asset categories mentioned in the last sentence, take a step back. There are two popular versions to consider.

Mutual funds are the traditional version and have been the average investor’s top choice for investing money in stocks and bonds since I started in the money business in 1972. To this day I believe they are the best funds for 2011 and into the future for most people. And I also believe that the best mutual funds in the stock and bond categories are the index funds which simply track an index. These are not actively managed in an attempt to beat their benchmark index… these funds simply track the index to duplicate its performance. Advantage: low cost of investing for you and no downside surprises in the performance department.

Hold that last thought, because there is at least one disadvantage to even the best mutual funds, even of the index variety. Investing money, moving money around, and liquidating shares all involve a time lag with mutual funds. For example, if the market is crashing and you want out NOW, an order to sell your stock funds won’t typically take effect until the close of the market at 4:00 P.M. Eastern Time. In other words, you don’t have INSTANT liquidity when you need it. This is no big deal for most people investing money in funds. They are long term investors and rarely make changes in a hurry.

If you would like added flexibility and instant liquidity when investing money in funds in 2011 and beyond consider adding the newer breed to your portfolio: EXCHANGE-TRADED funds (ETFs). These are typically INDEX FUNDS that trade on the major exchanges just like other popular stocks do. Investing money here is best done with a brokerage account at a major discount broker. You simply open an account and deposit money – then you’re ready to buy or sell these fund shares in a split second at a cost of about $10 a transaction.

ETFs trade like stocks but come in many varieties including stock index and bond index funds. Also available are specialty funds that invest in the likes of gold, silver and real estate. For example, if you are thinking of investing money in gold in 2011 you might want to consider an ETF that invests in gold. The advantage: the price of gold can move up or down quickly and you might want to move quickly if it starts to dive.

Now you know that when investing money in funds in 2011 and beyond you have two basic flavors to choose from. The best funds for most of the people most of the time are still mutual funds. For those of you who are more adventuresome the best funds to add to your portfolio are exchange traded funds.

Don’t overlook mutual funds in your search for the best investment for 2011 and beyond, because these investment packages offer most people advantages not found elsewhere. View your investment goal as putting together the best investment portfolio possible, one that doesn’t require your constant attention. Use mutual funds as your building blocks.

Every balanced and diversified investment portfolio consists basically of three parts: stocks, bonds, and money market securities (safe, liquid investments). Every investor who wants to sleep at night needs a diversified portfolio, and the best investment portfolio for 2011 and beyond will include alternative investments like gold and real estate as well. This can be a tall order if you scan the financial tables in search of the best investment in each category every year. Or you can approach things in a sensible fashion by simply investing with the biggest and best mutual fund companies.

You don’t need a stock brokerage account to invest in stocks and bonds, a commodities broker to invest in gold and silver, or a real estate broker to invest in real estate. Nor do you need a personal banker to find a place to stash some cash and earn interest with high safety. You can do all of the above by simply opening a mutual fund account with one or more of the biggest and best mutual fund companies in America. Then, at your fingertips, you’ve got all of the investment options you need to put together a truly diversified personal investment portfolio.

After all, mutual funds were designed for the majority of people who don’t have the time, expertise or inclination to manage a portfolio of individual investment securities like stocks and bonds. That’s what these funds do – they manage a portfolio of securities for their investors in the form of stock funds, bond funds, and money market funds. By investing in all three categories you can put together you own personal best investment portfolio for 2011 and for many years to come with relative ease. To add alternative investments to your portfolio, just add specialty stock funds that specialize in areas like gold or real estate.

Now, everyone wants to know who the best mutual fund companies are for obvious reasons. This is debatable; but the biggest and most popular are: Vanguard, Fidelity, and American Funds. They are clearly the largest in terms of assets managed and/or number of investors serviced, and they’ve been around for decades. All three have risen to the top by offering a wide array of quality funds and good service. The fund company picks the stocks, bonds, etc. and does the day to day portfolio management. You as an investor simply pick which funds to invest in and how much to invest in each.

Spend some time getting up to speed on mutual funds because they can greatly simplify your investment life. Face it, you’ll never find the single best investment for 2011 or for any year that follows. What you really need in these uncertain times is a truly diversified investment portfolio. Diversification is the key to investing for the future, and is also the signature of mutual funds. If there’s a better way than a collection of mutual funds for the average person to put together his or her best investment portfolio for 2011 and beyond, I’d sure like to know about it.