by Jeff Reeves | March 13, 2012 5:00 am
It’s a crazy market out there right now. Europe still is in turmoil, but the stock market has rallied strongly to start 2012. The tech-heavy Nasdaq has added almost 15% since Jan. 1, but “safe” stocks like Coca-Cola (NYSE:KO) and Procter & Gamble (NYSE:PG) have barely posted a profit in the same period.
It’s the way of the world in this challenging economic environment. One day the market is up or your portfolio is in favor, and the next day things get shaky and you record some short-term losses.
But take heart! If you’re an investor with a long-term strategy, focused on retirement decades down the road instead of short-term gains by the end of the year, you often can ignore these day-to-day gyrations in the market if you invest wisely.
By picking bulletproof mutual funds that will deliver a steady trickle of profits into your 401(k), you will ensure a safe retirement years from now no matter what horrible headlines might pop up in the short term and send Wall Street scurrying.
If you don’t have these funds in your 401(k) plan, don’t fear – if you are no longer with your previous employer you can “roll over” your cash into an IRA account with greater flexibility. You have a wider selection of mutual funds if you make the move to rollover your IRA, so these picks could be up for grabs.
Here are five such bulletproof funds for your 401(k) plan or IRA retirement account:
The Fidelity Capital & Income Fund (MUTF:FAGIX) is the poster child for low-risk mutual fund investments. It has scale, with assets of nearly $10 billion under management. It has the coveted five-star rating from Morningstar, one of the most respected mutual fund ratings firms in the world. And it also boasts a yield of 5.9% at current writing — ensuring a steady stream of profits from its bond holdings.
There assuredly are risks to Fidelity Capital & Income, notably because about 17% of its holdings include foreign bonds. Sovereign debt woes are indeed a problem in the short term. There also are a few high-yield bonds from less-than-stellar corporations with “junk” bond ratings.
However, more than 80% of the fund is in U.S. corporate bonds — including debt from reliable names like telecom Sprint Nextel (NYSE:S) and General Motors (NYSE:GM) financing arm GMCA — that have “investment grade” ratings above B grade.
So while there are a few slightly risky assets that could deliver nice returns, the vast majority of holdings are bulletproof corporates that will ensure slow and steady returns for your 401(k) or IRA.
How bulletproof? Well, the 10-year return on this fund is over 11% annually. That means $10,000 invested a decade ago would have turned into over $27,000 by now! The shorter-term five-year return also is impressive at nearly 8% annually.
Speaking of bond funds, you will be hard-pressed to find a more respected fund than the PIMCO Total Return Fund (MUTF:PTTRX). Managed by legendary bond trader Bill Gross, PIMCO has become synonymous with profitable investing in bonds, whether they be from the Treasury or foreign governments or convertible bonds.
Bill Gross got a bad rap at the beginning of 2011 because he underperformed the market for what seemed like the first time in history. His fund returned only 4.2% in 2011, which was at the bottom third of its peers.
But in the long run, it’s difficult to find anyone who can match his performance. Gross still has one of the best long-term track records in the bond business even after last year’s hiccup.
Just look at these recent stats from Morningstar showing his average annual return:
Even all-stars strike out once in a while, and long-term investors should be reluctant to give up on the proven success of Bill Gross and PIMCO funds. If you’re looking for a more actively traded fund than this mutual fund, Gross & Co. also have a new exchange-traded PIMCO fund for your IRA — the PIMCO Total Return ETF (NYSE:TRXT).
Looking for yield but still want to keep a foot planted firmly in stocks, as opposed to bonds? Look no further than Vanguard Dividend Growth (MUTF:VDIGX). This is a large-cap mutual fund with roughly $7.7 billion under management that focuses on long-term capital appreciation of stocks — but also current income via juicy dividends.
Top equity holdings right now include Occidental Petroleum (NYSE:OXY) with its 2.2% yield, PepsiCo (NYSE:PEP) with its 3.2% yield and Johnson & Johnson (NYSE:JNJ) with a 3.5% yield. The average yield is about 2.2% as of this writing — not stellar compared with bonds, but a good income stream.
The real performance of this fund, of course, comes from equity appreciation and not just the payouts from blue-chip holdings. Consider the 10-year return of 5.9% annually and the five-year return of 4.6% annually.
Equally attractive is the rock-bottom 0.34% expense ratio — a bargain fee that is Vanguard’s trademark. According to the management company, this is 70% lower than its peers.
Manager Donald J. Kilbride also is an old hand at Vanguard Dividend Growth. He is the sole manager, and has been with the fund since early 2006. So there are no worries of too many managers muddling the mix with picks, or a new staffer who won’t hold true to the long-term performance of the fund.
If you’re not as concerned with the income of dividends to hedge your bets, there are a number of high-growth funds out there that play the growth in big-name blue-chip stocks. The question, then, is which fund is right for your IRA or 401(k).
A large-cap growth fund that could be right for your portfolio is the Touchstone Sands Capital Select Growth (MUTF:PTSGX) mutual fund.
According to the prospectus, manager Frank Sands focuses the portfolio on picks with a market capitalization in excess of $25 billion, generally avoids companies that have a market capitalization of less than $2 billion. Current top holdings include names like Amazon.com (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Visa (NYSE:V).
This fund gets the elite five-star rating from Morningstar. The only knock against it is that it has a relatively steep 1.23% expense ratio — meaning you shave off that much from your annual returns, so the bar is set much higher for outperformance.
On the plus side? Sands has had zero problem getting his namesake fund to more than pay for itself. The five-year return is 8.5% and the 10-year return is 7.2% — meaning if you invested $10,000 in 2002, you would have about $20,000 via Touchstone Sands vs. about $15,000 from an S&P 500 index fund.
Sands has been running the show since 2000, and his long tenure and long history of beating the market is a big plus for investors. True, you’re not getting income from stocks like Amazon or Apple, but this mutual fund knows how to find the right growth investments to make it a highly profitable play for investors — even while relying on the relative stability of mega-cap blue chips like AAPL and AMZN.
Want a little more spice in your equity funds, but still reluctant to take on higher-risk investments? Look no further than the Vanguard Explorer Fund (MUTF:VEXPX). This mutual fund focuses on small-cap opportunities that can provide great growth over the long term.
This is an actively managed fund, so you’re putting your faith in the expertise of the Vanguard stock pickers here. But based on the track record of this funds and its managers, you can tap into market-beating performance for a very affordable advisory fee.
The 10-year return of Vanguard Explorer is roughly 6.5% annually — which would have turned $10,000 into about $18,000 since 2002, and significantly outperformed the S&P 500. The average return for the life of this fund is a very impressive 8.8% annually.
And the expense ratio is a very affordable 0.5%. This is 66% lower than the average expense ratio of funds with similar holdings, according to Vanguard’s research.
Current holdings include Alliance Data Systems Corporation (NYSE:ADS), Cooper Companies (NYSE:COO) and Sapient Corporation (NASDAQ:SAPE).
Small-cap investing is inherently more volatile than taking shelter in bonds or blue chips. However, the track record of Vanguard Explorer means this fund is worth a look even for those seeking lower volatility in their retirement investments.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.
Source URL: http://investorplace.com/2012/03/5-bulletproof-funds-for-your-401k-fagix-pttrx-vdigx-ptsgx-vexpx/
Short URL: http://invstplc.com/1dce5gQ
Copyright ©2015 InvestorPlace Media, LLC. All rights reserved. 700 Indian Springs Drive, Lancaster, PA 17601.