by Tom Taulli | March 24, 2011 11:23 am
401 k investing in the U.S. stock market has been no easy task lately. There has been a spike in oil prices – and many other commodities – as well as a major earthquake in Japan and a nuclear disaster. Despite all this, the Dow Jones Industrial Average is still above 12,000. That’s good news for 401k statements, but a very difficult development for investors.
After all, 401 k investors have long term investing goals. Which funds can really navigate the volatility and have good returns for your 401k in the long-term amid such events?
While an employee has little choice on the options in a 401k, there are certainly some common ones that are standouts. With the help of BrightScope, which rates 401 k plans, here is a group of top funds for the main types of assets classes (big cap, small cap, international and bonds):
Since the early 1980s, the bond market has had a tremendous bull run. So it is not a good bet for there to be large returns going forward for your 401k investments.
Then again, it can be helpful to have bond exposure since it helps to deal with the volatility. No doubt, this has been the case with the Vanguard Total Bond Market Index (MUTF: VBTIX) fund, which has $86.8 billion in assets. It is based on the widely followed Barclays Capital U.S. Aggregate Bond Index. A majority of the portfolio is in government issues.
Over the past decade, the average annual return for the Vanguard fund was 5.43%. In fact, during the financial crisis of 2008, the return was 5.43%.
International funds have been a good way to get extra return for a 401(k). And this should be the case for years to come.
One way to play this trend is the Dodge & Cox International Stock (MUTF: DODFX) fund, which has $45.9 billion in assets. All in all, the strategy is to focus on undervalued issues. Although, this means it can take some time to see results (keep in mind that the turnover is only 15%).
The Dodge & Cox fund also has a bent for larger companies. The top holdings include Naspers (PINK: NPSNY), Vodafone Group (NASDAQ: VOD), Bayer AG (PINK: BAYRY), Novartis (NYSE: NVS) and Roche Holding (PINK: RHHBY).
While small cap funds are volatile, the swings should be dampened for those investors who look to the long haul. It also helps if the fund focuses on high quality companies, which have strong competitive advantages.
To this end, the Neuberger Berman Genesis (MUTF: NBGIX) is a good choice. With $11.7 billion in assets, the main portfolio managers have been at the fund since the mid 1990s. So they certainly know how to manage various market cycles, which is critical for small cap funds.
The 10-year performance is a sizzling, at 11.49%. Actually, the fund was able to post a decent performance in 2008, which beat the market by over 4%.
American Funds Growth Fund (MUTF: AGTHX) is a mega equity fund, with $167.5 billion in assets. Because of its girth, the focus is on larger companies. However, there is a bent towards those with growth potential. The top holdings include Oracle (NASDAQ: ORCL), Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL).
Interestingly enough, the fund recently expanded its mandate to allow 25% of its portfolio to be invested in foreign securities. This should be a big help in finding more growth opportunities.
The gold standard for tracking the stock market in the U.S. is the Standard & Poor’s 500 Index. So why not buy a fund that essentially tracks this? Over the long-return, it should be a winning strategy and one of the top funds in the space is the Vanguard Institutional Index (MUTF: VINIX), which has $95.6 billion in assets.
Investors will also benefit from Vanguard’s rock-bottom fees. Consider that the expense ratio is only 0.05%. And the turnover ratio is a mere 4%.
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