9 great funds for young investors

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Business Week | By Stacy Rapacon, Kiplinger

Many millennials remain understandably wary of the stock market. But for young people with time on their side, these mutual funds present good long-term options.

The Great Recession has scared nearly an entire generation away from stocks. According to a 2013 survey by Wells Fargo, more than half of people age 22 to 32 lack confidence in the stock market.

Anton Bayer, chief executive of Up Capital Management, a registered investment adviser in Granite Bay, Calif., says this attitude is understandable given that young people have seen nothing but a high-volatility market during their investing lifetime.

"Their approach is 'If I don't do anything, I won't lose money,' but that's not good enough," Bayer says. "They need to engage. In order to build wealth, you can't be passive."

Mutual funds can be the best way for young investors to get in on the action. A single investment can include a diversified portfolio at a relatively low cost. Plus, Bayer points out, "in times of storms, mutual funds can weather the ups and downs a little bit better than a few individual stocks."

A solid investment base starts with index mutual funds, which mimic the returns of a broad market segment. These funds are easy for young investors to comprehend because there are neither exotic investment strategies to unravel nor the stock-picking whims of fund managers to decipher.

"A very simple, no-load index fund is the cheapest and easiest way to go," says Lauren Locker, a financial planner based in Little Falls, N.J. "It'll let you hit a little bit of everything, and you don't really have to pay too much attention to it."

Locker recommends Vanguard Total Stock Market (VTSMX). The majority of its portfolio (72.2 percent) is invested in giant- or large-company stocks, but it also dips into medium-, small- and micro-cap stocks. Its benchmark, the CRSP U.S. Total Market Index, is made up of about 3,600 U.S. stocks.

Over the past five years, Vanguard Total Stock Market has gained 26.0 percent annualized, ranking it in the top 12 percent of its "large blend" category. (Large blend funds invest in both growth and value stocks and are fairly representative of the entire stock market. All returns and related numbers are as of March 5.) The fund's expense ratio is a very low 0.17 percent per year. It requires a minimum initial investment of $3,000.

One note on fund performance figures: Stocks have been on a tear since the brutal bear market ended in March 2009, resulting in outsized gains during the past five years. Don't expect these heady returns to continue indefinitely. Over the long term, the average return of the stock market is closer to 10 percent per year.

Investing rookies might also enjoy the set-it-and-forget-it benefit of target-date funds. Get started by choosing the year in which you want to achieve your investing goal, such as retirement. Then, pick a fund with that year in its name. The managers will build the fund's asset allocation to suit your time horizon and dial down the risk as the fund's deadline approaches.

Three of the biggest fund families -- Fidelity, T. Rowe Price and Vanguard -- offer quality target-date options, says Locker. Vanguard boasts the lowest fees. The Vanguard Target Retirement 2050 (VFIFX) fund, suitable for a 29-year-old aiming to retire at age 65, has an expense ratio of just 0.18 percent. Fidelity's and T. Rowe's 2050 funds charge 0.82 percent and 0.78 percent, respectively.

T. Rowe Price Retirement 2050 (TRRMX) has the best performance record of the three, earning 23.9 percent annualized over the past five years, keeping pace with the widely followed Standard & Poor's 500 Index ($INX) and topping Vanguard 2050 by an average of 2.0 percentage points per year and Fidelity Freedom 2050 (FFFHX) by an average of 2.7 points per year.

Instead of the target-date approach, Bayer prefers using balanced funds, which generally invest in a mix of stocks and bonds. "These are very useful tools for younger investors because they're the whole package," he says. Over time, he suggests switching from more-aggressive balanced funds to more-conservative balanced funds as your investment needs change. For example, opt for the aggressive fund when you're young and have time on your side, then move into increasingly conservative balanced funds as you approach retirement.

Bayer likes Invesco Equity and Income (ACEIX), which Morningstar categorizes as "aggressive allocation," meaning the fund typically has 70 percent to 90 percent of its assets in stocks. He might trade it for a "moderate allocation" fund with 50 percent to 70 percent in stocks, such as Hartford Balanced (ITTAX), to ease up on risk. Unfortunately, both funds' Class A shares come with a 5.5 percent load -- a sales charge that can really take a bite out of your returns. But if they're available through your 401k, you may be able to skip that extra fee.

For a no-load balanced option, consider FPA Crescent (FPACX), a moderate allocation fund and member of the Kiplinger 25, a collection of our favorite no-load mutual funds. Manager Steven Romick is free to invest almost anywhere and in a range of different assets, from stocks and bonds to currencies and subprime home loans. But with his strategy of seeking out-of-favor stocks, he has found few compelling opportunities during the market's recent run. The fund currently has a portfolio that's 44.1 percent cash.

It has earned 16.7 percent over the past year, better than its peers by 4.0 percentage points, but it trailed the S&P 500 by 7.6 points. Long-term returns are more impressive: Over the past 15 years, it has gained an average of 9.9 percent a year, beating the S&P 500 by an average 5.4 percentage points a year and leading its category. The fund charges 1.14 percent in annual expenses and requires $1,500 to start.

After you settle on your core funds, you may want to devote a portion of your investing dollars to sector funds that offer the potential to outperform the broader stock market. These funds can (and probably will) have more ups and downs than core funds, but young investors with ample time to recover from investing stumbles can afford to take on the added risk.

Bayer suggests looking at the technology and biotech sectors -- both top performers over the past few years. What do these sectors have in common? Innovation. "They are introducing new products, new services, something that's allowing them to introduce new sources of revenue," says Bayer. "Buying early in innovation is a huge opportunity."

He recommends Fidelity Select Biotechnology (FBIOX). Manager Rajiv Kaul seeks companies with strong pipelines and breakthrough innovations on the horizon. Over the past three years, this Fidelity fund has ranked tops among health funds with a return of 47.4 percent annualized, beating its peers by an average of 26.9 percentage points per year and the S&P 500 by an average of 32.6 points per year. It requires a minimum initial investment of $2,500 and charges 0.79 percent in annual expenses.

Ivy Science and Technology (WSTAX) is a load fund that Bayer thinks is worth the cost. It has a sales charge of 5.75 percent on top of its 1.37 percent annual expense ratio, but the fund has returned a whopping 46.7 percent over the past year, 22.4 percentage points better than the S&P 500 and 10.7 points more than the average technology fund. Over the past ten years, it has outperformed 97 percent of its peers. Top holdings include household names Google (GOOG) and Facebook (FB) as well as lesser-known companies, such as Cree (CREE) and Aspen Technology (AZPN). The minimum initial investment is $500.

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6 great funds with small portfolios

12:30 PM funds, great, portfolios, Small No Comments

Business Week | By James K. Glassman, Kiplinger

With just 20 to 30 holdings, these slimmed-down mutual funds are nimble enough to outperform the market but still diversified enough to limit risk.

Twenty years ago, in his letter to Berkshire Hathaway (BRK.A) shareholders, Warren Buffett quoted Mae West, sex symbol of the 1930s: "Too much of a good thing can be wonderful."

The Oracle of Omaha was alluding to diversification, the benefits of which were overrated, he suggested. Explained Buffett: "I cannot understand why an investor . . . elects to put money into a business that is his 20th-favorite rather than simply adding that money to his top choices -- the businesses he understands best and that present the least risk, along with the greatest profit potential." Not to mention that when you own too many stocks, it's hard to keep track of them.

Of course, when you own too few stocks, you run the risk of a huge loss if one of them suffers a calamity. Enron employees learned that lesson the hard way in 2001. If, however, you own everything in the Standard & Poor's 500 Index ($INX), the most widely followed benchmark for the U.S. stock market, you will experience less-volatile performance. If a single company in the index were to vaporize, it would, at most, knock 0.3 percent off the value of your portfolio.

There's a happy medium between diversification and what Peter Lynch, the former manager of Fidelity Magellan, once called "diworsification," and it's probably a smaller number of stocks than you think. Consider research about long-term stock-market returns by Joel Greenblatt, the Columbia University professor and hedge fund manager. He found that if you owned the U.S. stock market as a whole, two-thirds of the time the range of returns varied from a loss of 8 percent to a gain of 28 percent. But if you owned just eight stocks, the range of performance was not that much greater: from a loss of 10 percent to a gain of 30 percent.

Daniel Burnside, writing in AAII Journal, published by the American Association of Individual Investors, looked at the market over a 41-year period ending in 2001 and concluded that owning 25 stocks reduced "unsystematic" risk (the risk of not diversifying at all) by 80 percent, while owning 100 stocks reduced that risk by 90 percent -- that is, not much more.

A manageable portfolio holds between 20 and 30 stocks. As long as they are roughly balanced by sector and weighted fairly equally, that number is enough to reduce systematic risk significantly. If you want to eliminate that risk, you can simply buy an exchange-traded fund such as Vanguard Total Stock MarketETF (VTI), which at last report held 3,657 stocks. But if you want to beat the market, you'll need to accept some risk, and the smartest way to do that is by slimming down your portfolio.

The same principle applies to funds. Sure, there are some great funds that own a lot of companies. Fidelity Low-Priced Stock (FLPSX), with 893 stocks, is a good one (the fund is a member of the Kiplinger 25). But I have a soft spot for more-artisanal funds, with small portfolios, low turnover and a founder who has often made the key decisions for decades.

Consider Parnassus (PARNX), launched 29 years ago by Jerome Dodson, a Berkeley political-science major. Dodson is still managing this paragon of socially screened investing. Parnassus owns 46 stocks, or about half the average for a U.S. stock fund, and nearly half of its assets are in just a dozen companies.

In a class by itself is Fairholme (FAIRX), run by founder Bruce Berkowitz, a bargain hunter to the extreme. Fairholme is more hedge fund than standard mutual fund, with only six stocks and a scattering of bonds. Its largest holding, American International Group (AIG), equals a whopping 47 percent of assets.

Both funds have delivered great long-term results, but they are also highly risky. In 2011, for instance, a year the overall U.S. market earned 2.1 percent, Fairholme fell 32.4 percent; the next year, it gained 35.8 percent, beating the S&P by 20 points. Morningstar gives Parnassus a risk rating of "high"; it is 23 percent more volatile than the average fund.

There are less volatile focused funds. ING Corporate Leaders Trust Series B (LEXCX), which turns 80 next year, holds a nearly unchanging portfolio of 22 stocks, headed by Union Pacific (UNP), at 12 percent of assets, and ExxonMobil (XOM), at 11 percent. The fund has beaten the S&P 500 handily over the past ten years, yet the fund's volatility was lower than the overall market's. And the annual expense ratio is only 0.52 percent -- about half that of the typical concentrated fund.

Jensen Quality Growth (JENSX) has been even less risky than Corporate Leaders, although its ten-year return is lower. That may be a decent trade-off: In 2008, when the market tumbled 37 percent, Jensen fell only 29 percent. It's a scrupulously structured fund that tries to keep the weightings of its holdings nearly equal. It owns 28 blue-chip stocks, led by PepsiCo (PEP), at just 5.1 percent of assets.

A strong concentrated fund that specializes in midsize companies is FPA Perennial (FPPFX). It owns 30 stocks and has an annual turnover rate of a mere 2 percent (suggesting that, on average, it holds a stock for 50 years). The portfolio favors industrial and consumer cyclical stocks and contains no banks or real estate companies. The risk level is average.

Unfortunately, three of the best concentrated funds closed to new investors at the end of last year. But keep an eye on them; if the market drops and investors bail out of stock funds, they could reopen soon. One is Sequoia (SEQUX), a 43-year-old fund managed by Robert Goldfarb, with 42 stocks and one-third of its $8 billion in assets concentrated in just three companies: Valeant Pharmaceuticals (VRX), a Canadian drug maker; Buffett's Berkshire Hathaway; and retailer TJX (TJX).

The other two, Yacktman Fund (YACKX) and Yacktman Focused (YAFFX), were founded by Donald Yacktman, who has lately ceded much of the funds' management responsibilities to his son Stephen. Focused has 37 stocks; Yacktman has 43. The portfolios are similar. Turnover is in the single digits, so if you're willing to plagiarize, you can simply copy the holdings and own the individual stocks yourself. Top holdings for both funds are PepsiCo, Procter & Gamble (PG) and Twenty-First Century Fox (FOXA).

Finally, don't forget the best-known concentrated portfolio of them all: the Dow Jones Industrial Average ($INDU), which you can buy as a SPDR-sponsored ETF nicknamed Diamonds (DIA). The Dow's 30 stocks have returned virtually the same as the S&P 500 for the past decade, with very little difference from year to year. That's proof -- if you need it -- that 30 stocks is enough.

The question, however, is whether your objective as an investor is merely to replicate the market. If it is, then buy Diamonds or, to be slightly more daring, a fund such as ING Corporate Leaders. But if you really want to try to thump the averages, you have two choices: Do it yourself by assembling your own portfolio of 20 to 30 stocks, or put yourself in the hands of someone like Berkowitz or Dodson, for a fee of about 1 percent a year. If you select the latter course, don't put all your eggs in the concentrated-fund basket. But some eggs, certainly.

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5 Reasons for the index funds add to your portfolio

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| By Daniel Solin, US News & world report

Tests according to mutual funds and ETFs passively track produce their benchmarks better returns for investors than actively managed ones.

Almost 18 years ago, Rex Sinquefield, co-founder who fund advisors, dimensional had to say this about the debate between the advocates of active and passive management: "so anyone who still believes that markets work not?" It apparently is only the North Koreans, the Cubans and the active Manager."

At that time, were only a few in the investment sector especially concerned about index-based investing. Sinquefield's comments were largely ignored. How times have changed. "Debate" has all but disappeared as the evidence in favor of the index was mounted to invest (which I like to "evidence-based investing").

You will need no further than the SPIVA means scorecard for overwhelming evidence to support the destruction of active management. In an article in the "Journal of indexes", Cletus dash, formerly Managing Director of S - & P-indexes, mentioned this "lessons learned" managed from a decade tracking the performance of the index and active funds:

Outperformance over longer periods of time.All measured a majority of actively managed funds exceed five-year cycle their indexes.

Outperformance in theorize.In the two bear markets in the last decade, a majority of actively managed funds their benchmarks was under.

No evidence of performance persistence.Dash takes the chance powerful funds looking for a prospectively with past outperformance, as an indicator of "similar or less than random expectations."

Fixed income funds fare even worse than equity.Have to dash "almost all municipal bond funds difficulties, that the S & P national AMT-free municipal bond index to beat."

Indexing works in small caps.There is no merit, the oft-repeated mantra of the active managers who can surpass it in the small-cap markets, because these markets are less efficient. Indexing works as well as for small caps for large-caps.

Investors have taken note of this information and have money in cast index funds, dealing a blow to active managers. According to a vanguard (citing data from Morningstar) at the end of 2012, assets in index U.S. domiciled mutual funds and 34 percent of shares and 18 percent of fixed income exchange traded funds accounted for funds.

A vanguard study, "The case funds invest for index for UK investors," showed that active fund managers in a range of funds for investors in the UK "have their benchmarks over most fund categories and time periods as below average." Adam Laird, a passive investment manager at Hargreaves Lansdown, commenting on the report by stating: "this study is further evidence of a sad truth-many active managers fail."

The threat of the traditional securities trading is now too big to ignore. Active Manager can not compete based on the data, and seem to be resorted to name-calling. The "debate" was sunk to new lows recently with a comment in an article in the financial times, written by David Smith, UK-based active fund managers with Hargreaves Lansdown fund managers. Smith is observed that passive management a "parasitic industry" will benefit from the activity of the active Manager. Smith observed that index funds "are only a smart strategy if you believe that active managers will keep the market largely efficient." Smith not only rejects the efficient-market hypothesis, but is "surprised" that others do not match.

Vanguard founder Jack Bogle on Smith's conflict with the finding responded: "whether markets are efficient or inefficient, is beside the point. The cost questions hypothesis is all that is necessary to explain why works indexing: gross on the market as a whole, less the costs to get back, that this return is equivalent to who will actually receive the net return investors. "

The shift of tactics by active Manager of indexing "upstarts", to ignore insults, says for investors. Presumably, if they have data to support the base for their investment strategy and living expenses, she would publish it. Investors would be well advised to focus on the evidence and the heated rhetoric.

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Why your fund's 5-year returns are about to skyrocket

12:30 PM 5year, about, funds, returns, skyrocket No Comments

| By Steven Goldberg, Kiplinger

When the market crash of 2008 fades into history, a lot of mutual funds will look more appealing. But remember, bear markets show what a fund is really made of.

Your stock funds' five-year returns are getting ready to double. Why? It's just a matter of the calendar: By Dec. 31, the stock market's disastrous 37-percent plunge in 2008 will no longer be part of funds' five-year records.

Of course, this calendar quirk won't put more money in your pocket. To the extent you were in stocks in 2008 or over the entire bear market, which sliced 55.3 percent from Standard & Poor's 500-stock index ($INX) from Oct. 9, 2007, through March 9, 2009, you almost certainly lost money -- quite possibly a lot of it.

But dropping '08 from the five-year figures will make a lot of funds look shinier and more appealing -- if you don't look further back than the past five years. Don't make that mistake.

Look at how returns can grow. At the end of August, the five-year annualized return for the S&P 500 was 7.3 percent. If you assume that the market will be absolutely flat from Sept. 1 until the end of this year (an approach I borrowed from Chuck Jaffe at MarketWatch.com), the five-year return for the S&P will swell to an annualized 14.5 percent. The table here shows returns and projected returns for the 20 largest actively managed stock funds.)

Of course, if the market tanks between now and year's end, the five-year numbers won't look quite so pretty. But it's extremely unlikely that stocks will lose anywhere near as much as they did in the last four months of 2008, when the S&P index surrendered 28.9 percent. And, assuming that the market doesn't collapse in early 2014, the five-year returns will continue to swell a while longer because the S&P 500 plunged 25 percent from the start of 2009 until the market bottomed on March 9 of that year.

The picture is even more dramatic for foreign-stock funds. Assuming that the MSCI EAFE, which tracks mostly large-company stocks in developed nations, is flat between Sept.1 and the end of 2013, foreign stock funds will look even hotter. The EAFE index returned only 2.1 percent annualized for the five years that ended Aug. 31. But if the index merely stays flat, the five-year annualized return will balloon to 9.6 percent.

Returns for emerging-markets funds will also inflate. At the end of August, the MSCI Emerging Markets index had returned an annualized 2.2 percent over the previous five years. If the index is unchanged for the rest of the year, the five-year annualized return will balloon to 12.9 percent.

I'm willing to bet that we're about to get bombarded with ads from mutual fund companies crowing about their funds' five-year returns.

But savvy investors shouldn't forget what happened to funds during the cataclysmic 2007-09 bear market. In my view, you learn more about a fund from a bear market than you do from a bull market. It's nice to own funds that beat the indexes in bull markets. But it's much more important to own funds that hold up better than the benchmarks in down markets. And the sad fact is that precious few funds can beat the averages in both bull and bear markets. For the most part, you have to pick your poison.

With that in mind, look at the funds in the aforementioned table. It's easy to separate the riskier funds from the safer ones. Dodge & Cox International Stock (DODFX), which lost 62.3 percent, and Dodge & Cox Stock (DODGX), down 62.1 percent, top the bear-market losers. That's a large part of the reason they're on my avoid list. (In this matter, my views diverge from those of the editors of Kiplinger's Personal Finance; both funds are members of the Kiplinger 25.)

I think you should be more forgiving of two other big losers among the foreign funds: Harbor International (HAINX), down 57.9 percent, and Oppenheimer Developing Markets A (ODMAX), off 56.3 percent, because they lost less than their benchmark indexes. Both are quality funds (although you may have to pay a commission to buy the Oppenheimer fund).

On the positive side, Vanguard Health Care (VGHCX) lost just 35.5 percent, which not only shows the defensive characteristics of this sector but also speaks well for the fund.

But the two diversified funds that held up best in the bear market, Fidelity Contrafund (FCNTX) and Vanguard Primecap (VPMCX), both off 47.8 percent, are the real winners here. I don't know how Fidelity's Will Danoff continues to put up great numbers with $97 billion in assets, but he does. Similarly, Primecap Management Company, which runs the Vanguard fund, is managing a boatload of money in the same style in several different funds, but it does so superbly.

The bottom line: Stock funds got a true stress test during the bear market. Their sponsors want you to forget those big losses. But in picking funds, this is a number to always keep in mind. Five-year returns are informative, too. But they change, sometimes dramatically, for reasons that have nothing to do with what their managers have done lately.

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Spanish village to raise funds with marijuana

6:16 PM funds, marijuana, raise, Spanish, village No Comments

MADRID — A tiny Spanish village has voted to lease land for growing marijuana as a source of desperately needed revenue — a unique but legally questionable way of battling an economic crisis highlighted by staggering unemployment and a looming recession.

A government official with the National Drug Plan said such planting would in fact be against the law and that prosecutors would intervene as soon as the first pot seed was sown.

The village of Rasquera, population 900 and in the northeastern Catalonia region, said its town hall councilors approved the plan Wednesday night in a 4-3 vote.

Rasquera is a picturesque, compact hamlet of stone buildings at the foot of a mountain range in Tarragona province. It has a castle that dates back to the 12th century.

The Barcelona newspaper La Vanguardia says it is the kind of village that is dying — its young people leaving for lack of work, and those left behind desperate for some lure to keep people put.

The idea is for private citizens to lease or lend land to town hall, which would then create a company to manage the land and lease it to an association of marijuana-smokers in Barcelona.

Under Spanish law, consumption in private of cannabis in small amounts is allowed. But growing it for sale, or advertising it or selling it, are illegal, the anti-drug official said on condition of anonymity under department policy.

The group that wants to acquire the marijuana, called ABCDA, said on its website that it will make an initial investment of $40,000 but makes no mention of how much it will pay Rasquera per year. A representative who declined to give his name said more details would come when ABCDA signs a formal agreement with the village in the coming days.

ABCDA said the project would create 40 jobs in Rasquera — workers to grow, harvest and package the pot — and the marijuana produced would go to ABCDA members.

Rasquera's mayor, Bernat Pellisa, could not immediately be reached for comment Thursday.

But after the Wednesday night vote he hailed the plan. "It is a question of opportunity, which is going to bring in money and create jobs," Pellisa.

The National Drug Plan official said Thursday the project has zero chance of getting off the ground.

If it somehow did, Rasquera's way of raising money in hard times would indeed be novel.

Many Spanish cities and towns are trying to cope by cutting spending on things like social services such as health care and education.

Spain's deficit for 2011 was 8.5 percent of GDP, and the country is now about to enter another recession, with unemployment at nearly 23 percent.

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Goldman $1.3 billion in Libyan funds traded

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Goldman Sachs invests more than $1.3 billion of Libya's sovereign wealth funds in currency bets and other shops in 2008 and the investment more than 98 percent of its value lost the Wall Street Journal reported, citing internal Goldman documents.

If the Fund, controlled by Colonel Muammar Al-Qadhafi, made offered huge losses Goldman Libya said the way to one of the largest shareholders, the magazine, trusted relying on people with the matter.

Goldman Sachs was unavailable for comment, outside the normal U.S. business hours.

Under the various proposals by Goldman Sachs to recoup the losses one was getting $5 billion in preferred Goldman shares in the Libya securities would invest USD 3.7 billion to the firm, the paper added.

The documents also show, that company Chief Executive Lloyd Blankfein, its finances, the chief David Viniar and top executive Michael Sherwood in this context discussions were involved in the magazine reports.

The Libyan funds paid apparently $1.3 billion for options on a basket of currencies and six stocks - Citigroup Inc, Italian bank UniCredit SpA, Spanish bank Banco Santander, German insurance giant Allianz, French energy company Electricite de France and Italian energy company ENI SpA, which said paper.

Copyright 2011 Thomson Reuters.

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