Managing your Risks
Is there anything you can do to protect your portfolio in case the market cracks? Absolutely. This is where careful fund selection will pay off big. Many stock funds have a history of holding up relatively well in stock market declines.
Some of those funds are value-oriented vehicles. They buy shares of companies facing temporary problems that are trading at low or depressed levels. The idea is that that even in a market decline those shares don't have much further to fall — while they could rebound sharply if their fortunes improve.
Other funds — typically known as total return or equity-income funds — hold stocks of companies that offer high dividend yields which can help support their price. A third option: balanced funds, which hold a mix of stocks and bonds to smooth out returns.
Advice for My Mom — and You!
With all of this in mind, I've spent the last three weeks racking my brain for the right choice. Mom said she's willing to risk some losses; this isn't the core of my parents' retirement fund. In fact, she doesn't have any exposure to the stock market yet; thus, I figure I'll choose an equity fund.
But which one should I choose? The domestic stock market has been rather unpredictable. What if I invest her money in a domestic equity fund and the market falls 20% next week? How can I explain that to a woman who has been in passbook savings accounts and CDs all her life? On the other hand, foreign markets have been fairly jumpy as well. And do I really want to invest my Mom's money in shares of some company in Hong Kong?
I've been tempted to send the money back. But if I do, she'll just put it into a new bank CD — and we can't have that. So here's the rundown on the funds that made my final list. If I ever make up my mind, I'll let you know which fund won. Meanwhile, any of them would make a solid addition to most portfolios — maybe even your mom's.
Imagine the pressure. Really, giving investment advice to strangers who read my articles is tough enough. But making risk decisions with my mother's hard-saved dough? What if the fund manager loses her money? He'll never know — but I'll never hear the end of it! After all, I'm supposed to be the family expert in these matters.
There's no way around it: In this instance more than ever, I can't afford to choose the wrong fund.
General Concepts
Before we look at the specifics for my mom, let's look at some general ideas for your investment dollars.
In recent years, investors have poured billions of dollars into mutual funds. Trouble is, some fund investors don't understand the risks that mutual funds can carry. When things go wrong in the stock market, some funds are liable to crumple. In that event, some fund shareholders will learn a difficult lesson about risk.
That's not to say you should stay clear of stock funds. Stock funds are one of the best ways to invest your long-term savings. One reason is that they've offered much better long-term returns than bonds and bank accounts.
As always, the best advice is to stick with your long-term investment strategy. That strategy should include a commitment to stocks ranging from 30 percent to 80 percent or more of your total portfolio, depending upon how willing and able you are to ride out temporary declines in your investments.
For example, a young couple with a solid financial cushion who are saving for long-term goals might put 70 percent or so of their holdings in stocks. A retiree living on a fixed income — like my mother — might take a more cautious approach.
The Funds
Fund manager Monika Degan of the Aim Blue Chip Fund looks for companies that generate consistent earnings growth over time. While she isn't afraid of sectors such as technology, she isn't willing to pay ridiculous prices for shares of the fastest-growing company. But she's no cheapskate either, and the portfolio is populated with popular shares of household-name companies that Mom would recognize — companies like Johnson and Johnson, Exxon Mobil and Home Depot.
This fund has delivered superb returns in recent years, gaining 23 percent annually during the past five years. Meanwhile, the fund has been less risky than its average competitor.
Mom likes to travel, and the T. Rowe Price International Stock fund has established an enviable record as a consistent performer during recent years. It's also capable of shooting the lights out when markets move in the right direction. The fund's assets are diversified among shares of European firms and stocks of companies in emerging markets. Its modest commitment to Japanese stocks is also a comfort, since the outlook for that market remains clouded at best.
One solid total return pick fund is Evergreen Total Return (800 235-0064). Manager Nola Falcone recently has invested in high-yielding telecomunications stocks, electric utilities and financial stocks to boost the fund's yield. She also sniffs out shares of firms that are temporarily depressed, which can deliver solid capital gains as their situations improve. Over the past ten years, the fund has provided higher returns than its competitors at much less risk.
The Invesco Balanced Fund (800 525-8085) offers one solid choice for investors who wish to reduce their risk. This fund has gained around 18 percent annually during the past five years, but has been only about half as risky as the typical stock fund. The fund's management team invests 50-70 percent of its portfolio in shares of companies that can deliver solid earnings growth over time. The fund also holds a stake in top-quality bonds that can offer some stability during periods when the stock market stumbles.
So as you can see, these all look like pretty good places to park mom's money. Wish me luck.
