Welcome to our new column! While my wife and business partner Barbara Drebing and I – we've run a fee-only financial advisory firm the past 23 years – have done an occasional article before, this is the beginning of "Mutually Yours," focusing on the mutual-fund industry. We will be alternating bylines in this space on a somewhat regular basis.
First, a look back. The period between 1982 and 1999 looks pretty good right about now. Bumps along the road, like the 1987 market meltdown, were tremendously upsetting at the time, but the period as a whole turned out to be user-friendly to both stock and bond investors.
On the other hand, the 2000-02 time frame was uncomfortable for many stock-market investors, especially those focused on technology (though the bond market did all right during that three-year period). In 2003, we saw some great results for investors, with 2004 ending up okay with its post-election rally; the bond market saw modest results in both 2003 and 2004.
This brings us up to date, with a year that's so far been marked by unusually low rates of stock-market volatility. Longer-term bonds have held their own. Money-market rates have started to look more respectable, following a period where some funds failed to hit even a 1 percent yield.
With stock and bond investors often skeptical, the big ticket has been real estate; commodities have captured some attention as well.
Here are four phrases to live by as we go through the second half of 2005. Since Barbara and I like mutual funds as a way to invest, many of the vehicles we suggest to meet life goals, especially in the stock market, refer to funds, preferably no-loads.
• Let the investment fit the need. The mantra here is short-term needs, short-term (read: low-risk) investments; long-term needs need long-term time horizons. Have a coordinated strategy for IRA investments that is different from that used to pay for next year's vacation or home improvement.
• Diversify, diversity, diversify. Sure, it's a dream to put all your dollars on red and take home the bank, but such dreams usually end up as nightmares.
Stocks, bonds, cash, real estate – all have a place at the table. And blending different kinds of stocks and bonds do, too. We're especially partial to mixes of "no-load" funds that represent the best thinking of money managers who specialize in different parts of the markets.
• Flexibility is often a plus. Since the fund gurus at Morningstar introduced fund-style boxes some years ago, too many investment strategies seem to begin and end by picking a fund or money manager in the style of "one from column a, one from column b."
The virtue of a money manager confining his/her picks to one-style box is often overrated, and can easily lead to a rigid investment philosophy. It's desirable to own at least some stock-mutual funds where a highly regarded manager has discretion to move about the whole stock market.
Such funds often use the buzzword of "all cap." The same concept applies to bonds, where there are a few bond managers left who retain the right to adjust maturities, buy U.S. or foreign bonds, and go up or down the quality ladder as they think appropriate.
• Expenses matter. When stock-market returns were frequently in the teens or better, too many investors thought, "What's a point or two more of expenses among friends, especially for a red-hot stock-market sector?"
With a more muted environment, fund costs demand more attention.
Now that we've set the stage with some perspective, we'll look at some specific ideas for investing in future columns. We welcome your suggestions or comments.
Neil B. Kauffman, with Barbara G. Drebing, are principals of Kauffman & Drebing, LLC.