by Jeff Reeves | December 12, 2012 7:00 am
Picking stocks is a difficult game, especially in this volatile market. But mutual fund investors with a 401k plan don’t necessarily have it any easier.
After all, they get their list of funds, then have to decide which ones to buy — and how much they should put in them — just like stock pickers. And sometimes the strategy and expenses can be just as confusing as dissecting an individual corporation’s 10-K filing with the SEC.
If you’re looking to take the guesswork out of your 401(k) in 2013, here are five individual funds that rank at the top of their class. These mutual funds would be a great addition to your 401(k) or even your IRA, but more importantly, each is representative of a specific asset class that I think you should invest in. If you can’t find these particular mutual funds in your 401(k) group, try to find the “flavor” in a similar investment. That way, even if you can’t pick the exact list here you can hopefully enjoy similar returns in the New Year.
Here are the best 401(k) funds for 2013:
What if you don’t really want to overthink things and simply want to “buy the market” to get a piece of stocks in an easy and low-cost way? There’s nothing better than an index fund if that’s the case — which, as the name implies, is a mutual fund that is locked into a benchmark and its constituent holdings.
Vanguard pioneered low-cost index funds, and its Vanguard 500 Index (MUTF:VFINX) is one of the most popular products out there with more than $25 billion under management and a rock-bottom 0.17% expense ratio. That’s a mere $17 on every $10,000 invested!
Your holdings are the holdings in the S&P 500 — blue chips you know and love that include Apple (NASDAQ:AAPL) and General Electric (NYSE:GE) — so it’s easy to know what’s in this Vanguard fund. It’s also easy to track your performance, since you simply watch the headline index; your fund will mirror the performance almost exactly.
Index funds are the bedrock of any good 401k because they are low-cost, and because active managers have a hard time outperforming them. It might surprise you, but passive index funds regularly return more money to investors than human beings picking stocks on their own analysis!
So don’t get crazy or enamored with a manager or a strategy. An index fund keeps expenses down and performance up.
If you can’t add VFINX, ask your 401k administrator for another index fund that is similar. Any good plan should provide these kinds of options to investors.
If you’re a long-term investor with many years until retirement, one of the areas you might want to consider in your 401k next year is small-cap growth — that is, smaller companies that have a lot of upside potential as they gain reach and scale. Small-cap companies can be profit powerhouses when they hit on a great new product, and even if there are some rocky market movements in 2013, you can expect smaller and more agile companies to get up to speed faster than lumbering blue chips.
Check your 401k plan for your personal small-cap growth fund options. If possible, consider Janus Triton (MUTF:JATTX) since it’s one of the best small-cap growth funds out there. It has earned a five-star rating from Morningstar, and a lifetime rate of return that tallies bout 11% annually.
Current holdings include Dresser-Rand (NYSE:DRC), TransDigm Group (NYSE:TDG) and MSCI Inc. (NYSE:MSCI)
Managers Brian Schaub and Chad Meade have been with the fund since 2006, proving there is stability in strategy and leadership here.
Janus also has no transaction costs and a reasonable expense ratio of 0.94%. That means it charges $94 for every $10,000 you invest as a management fee.
With U.S. Treasuries and investment-grade corporate bonds providing paltry yields, many investors have been looking to blue chips for income opportunities. After all, if you can get a 3% dividend in some of the most stable utility and consumer staples stocks out there, why should you settle for half that in bonds?
If you like the idea of bigger yields and don’t mind the added equity risk of dividend stocks, then a dividend fund should be part of your 401k holdings. One of the best — and most widely held, with more than $2 billion in assets — is the Fidelity Strategic Dividend & Income Fund (MUTF:FSDIX).
The fund gets four stars from Morningstar, has no transaction charges and an expense ratio of just 0.84%. That’s an $84 charge on every $10,000 you have invested.
FSDIX currently has a yield of about 2.5% thanks to bedrock blue chips like Exxon Mobil (NYSE:XOM), Verizon (NYSE:VZ) and Procter & Gamble (NYSE:PG) in its holdings.
You can find other funds with more yield, but beware chasing large dividends in exchange for share price declines. FSDIX has a lifetime return of about 6% annually, so this is a fund that doesn’t trade big dividends for underperforming stocks.
If you’re concerned with income but don’t want to take on undue risk, consider a large-cap dividend fund in 2013.
Global equity markets have seen tough times in recent years, with China in particular underperforming domestic indices like the S&P 500. However, if you’re a longer-term investor worried about making sure you find the right investments over the next decade instead of the next few months, you should strongly consider investing in international growth. After all, the idea is to buy low and sell high — not wait until the rally then buy at the top.
One of the best international growth opportunities for 401k investors right now is the Oakmark International (MUTF:OAKIX) fund. This mutual fund has a lifetime return of over 10% annually, a five-star ranking from Morningstar and an impressive $9 billion under management.
Since this is a “blend” fund that mixes both value and growth plays, there is some stability here via some international blue chips like Daimler AG, Credit Suisse (NYSE:CS) and Canon (NYSE:CAJ). So don’t think you’ll be taking a Hail Mary on the next Chinese startup with this fund. Manager David G. Herro has been with the fund since 1992, and that kind of international equity experience is crucial to understanding global markets.
The expense ratio is a reasonable 1.06%, meaning you pay $106 for every $10,000 invested.
When you think about bond investing, one firm comes to mind above all others: PIMCO, with its iconic manager, Bill Gross. So if it’s offered, you should consider adding the PIMCO Total Return (NYSE:PTTCX) bond fund in your 401k portfolio for low-risk income as well as a steady foundation of growth.
Bonds don’t return as much as investments in stocks, especially in this low-interest-rate environment. However, they are much more reliable in their returns — especially when you have someone like Bill Gross ranking the bonds based on where he can get the best yield without sacrificing a risk of default. The Total Return fund invests only up to 10% of its portfolio in “junk” bonds, which offer higher yield but greater risk, so this is one of the most stable income investments out there.
The expense ratio is a decent 1.6% — about $160 on $10,000 invested — and many participants must pay a transaction fee. However, the performance of this fund is well above its peers and could be worth the price of admission.
If you can’t add the PIMCO fund, however, I strongly advise having some kind of income fund via investment-grade bonds in your portfolio — particularly if you are close to retirement and worried about capital preservation as much as growth.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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