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,


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

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