What is a Good Mutual Fund for a Mid-Life Investor?


Dear SmallIvy,

Ask SmallIvy

I’m 45 and looking to invest.  What would be a good mutual fund for someone of my age?

Thank you,

Richard

Dear Richard,

As one gets older and closer to the age when the money from investments will be needed one must become more conservative.  Many people realized this a couple of years ago.  After riding an incredible stock market touched off by the tax cuts of 2003, the housing bubble which allowed people to buy stuff beyond their means, and an accommodative Federal Reserve many people were planning their retirements to an island somewhere.  At that point the bottom fell out and those same people suddenly saw working for several more years in their future.

For those who resisted the urge to pull their remaining money out and hide it under their mattresses their portfolios largely recovered over the next year.  This is often the case except for rare occasions such as the stock market of the 1929(which took about 15 years to fully recover).  Another example where recoveries did occur is the crash you’ve never heard of in the 1920’s and the 1987 meltdown.  (Perhaps attempts by the government to fix the economy in the 1930’s is the reason for the slow recovery, but that is a subject of debate and a tangent from the question.)

The point is, one should grow more conservative as one’s time horizon narrows.  There are two basic strategies to do this:

1) Hold a portion of money in bonds and fixed income assets such as utilities, REITs, preferred stocks, and other high-yielding assets.  The rule-of-thumb is to hold the percentage of fixed income assets equal to your age and the rest in stocks.  At 45, you would hold 45% fixed income and 55% in stocks by this rule.  Any mutual funds whose objective is current income would fit the bill.  In open-ended funds, look for those that are labeled “Income.”  In closed-ended funds I’ve always liked Duff and Phelps (DNP), although one must be careful not to buy when the premium is too high.  Buying a few different funds is a good idea since the poor performance of one can  be offset by the good performance of another.

The benefit of bonds is that they have a specified lifetime after which the company will pay them off at the par value assuming the company is still able to do so.  The advantage of bonds and high yielding stocks is that the yield tends to reduce the level of price declines (since as the price falls the yield percentage increases, attracting buyers).  A good yield also makes up for years of stagnant growth since at least the investor is getting some return.

2) Hold enough cash to cover expenses for the next 5-10 years and hold the rest in stocks or stock mutual funds.  The reason for this is that most stock market falls last less than 5 years so as long as you have the cash on hand to meet expenses, you can wait for this recovery.  Here, if using mutual funds, you should buy a group of funds including a value fund, a growth fund, and an international fund.  Also, be sure to hold approximately equal amounts of large-cap, mid-cap, and small-cap stocks (favoring the small caps would produce a higher return but a bumpier ride).   One strategy would be to buy index funds that target each of these market segments. 

The goal in picking funds should mainly be to minimize expenses.  Because they need to invest in so many stocks, most mutual funds will perform about the same in their investments; therefore, the one with the lowest fees will perform the best over the long-haul.  If you try to buy those that performed the best in the past you’ll often find yourself buying a basket of pricy stocks that will then stagnate.

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment for this blog.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and general information on picking stocks and growing wealth in general. It is not a solicitation to buy or sell stocks or any security. In addition the writer of this blog is not an accountant and writings should not be taken as tax advice which should be left to a CPA.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

Taking time off


Small Investor Readers,

I’ll be taking a few days off from blog writing for the holidays, starting up again in the new year.  Feel free to write in questions and I’ll address them when I start up again.  In the mean time, feel free to scan through the archives – there is a lot there.   Here’s hoping everyone has a great holiday season.

SmallIvy

Five Simple Ways to Save Money for Investing


Few people take $1000 and become millionaires by investing.  Most of the millionaires have spent decades regularly putting money aside, buying up shares, and reinvesting the profits.  When one can build up enough assets such that income from your investments is being used to buy more shares, wealth can grow very quickly. 

While many people would like to start investing and building wealth, they never seem to have money to do so.  Human nature is to continue to add obligations (houses, phones, clubs, vehicles, toys) until all of the money one makes is spoken for before the start of the month.  At that point one is just treading water – never building up any wealth but not going into debt either.  Eventually a car breaks down, a new roof is needed, or a medical emergency occurs, however, at which point one goes into debt.  That adds another obligation – the interest for the loan.  In order to grow wealthy and invest one must reduce obligations such that one has money left over at the end of the month to invest.  While a few hundred dollars a month may not seem like a lot, with time those investments will expand one’s income such that one can move-up in lifestyle or take on a lower paying job with greater personal benefits.  Here are some simple things one can do to save a few extra dollars:

1) Buy a used car for cash.  A new car will lose 1/2 of its value in the first four years.  This means that a $40,000 car will cost $5,000 per year in depreciation alone (never mind interest ion the car loan).  Even if one buys with zero interest, one is still losing the depreciation.  If you buy a four-year old car, your cost will only be $2500 per year in depreciation, and the repair bills will probably not be much greater than that for the new car (cars can typically go 200,000-300,000 miles routinely nowadays.  If you put half of the money that you would have been putting towards payments in a savings account and invest the other half, you can replace the car every 4-6 years for cash and also be investing $1250 each year.  After a while you will be able to easily buy a new car for cash every four-eight years, but why would you?

2) Get water instead of soft drinks at restaurants.  Ever notice that you order that drink but only take a few sips during your meal?  At $2 per drink, for people who eat out five times a week that is $520 per person per year.  Alcohol, at $5-$10 per drink is even worse.  Order water – you’ll barely miss the soda, save $1000-$2000 per family to invest each year, and save 150 calories per meal in addition.  You can buy alcohol at home for $2 or less per drink. (Note for kids, offer to give them $1 if they order water instead of a drink.  They will probably do this 90% of the time.  You’ll save $1 per child, plus they’ll learn that buying the drink costs money and probably be less likely to automatically order a drink when they are adults.)

3) Turn to professionals.  This may seem backwards, but if you have a big car repair, need to change a water heater out, or need to re-seed the lawn and you don’t consider it a hobby, it may actually make sense to hire a professional to do it.  If you are able to take on extra hours at work, that eight hours you would spend putting in that water heater (and really away from your family since they won’t want to be around you with all the cursing going on) could be spent at work instead.  If you pay the professional $200 and you get paid $40 per hour, you have just made an extra $120 by hiring the pro.  Sure, by having the tools and experience he may only spend an hour doing the job, but if it would have taken you eight hours what is the difference?

4) Eat out less often.  If you go out regularly keep track of how much you are spending each month on restaurants.  You may be surprised to learn that you are spending thousands of dollars each month.  Try eating a few more meals at home each week.  You can save about $50 per meal, or $2500 per year, just by eating one dinner extra a week in.  If you get tired of TV dinners and frozen meals, pick up a copy of Betty Crocker and learn to make some simple dishes like pork chops or fried chicken.  Another choice for busy people is to make crock pot meals – they’re easy to make and ready when you get home.  Give it a try – you’ll be eating healthier and saving money.

5) Avoid time shares.  It may seem great to have that place waiting for you once a year, but you’ll probably find that you’re busy on that week or you just don’t feel like going to the same spot year after year.  If you simply rent a place when desired instead you won’t be paying all of those maintenance fees, have freedom to choose when and where you wish to go, and not have the headache of trying to unload a timeshare later.  You will likely save thousands of dollars each year in maintenance fees and missed vacations.

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment for this blog.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. In addition the writer of this blog is not an accountant and writings should not be taken as tax advice which should be left to a CPA.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing