Credit: Shutterstock photoSpecial Report:Mutual Fund Strategies
M utual-fund portfolios geared for long-term investing come in all shapes and sizes. But those built for success share one common thread: They'll take into account your age, existing assets, income needs and risk tolerance.
That's where mutual-fund investing strategy almost becomes an art.
Take a young college student who inherited a life insurance policy because her father passed away. The goal of the portfolio is to grow but at the same time to provide income during the student's college years. At the end of college, she'll need to have enough money to buy her first house or a condo.
"That's an interesting case," said Brad Ledwith, CEO at Ledwith Financial Wealth Management and author of "If You Are Suddenly Single." "I've had four or five minors that came to me, and we've been able to invest their money in the way that is more growth-oriented. But here, we're also investing for immediate income needs for college funding."
So Ledwith has created a mutual-fund investment strategy to specifically fill the student's income needs for the next four to five years. He's structured a portfolio of approximately 80% stocks and 20% bonds. He's also tried to lower the risk by looking at dividend-paying stock mutual funds. "I've been trying to look at beta going forward and put something in the portfolio that will temper any type of market volatility."
How does he plan to accomplish this with mutual funds?
In the large-cap arena, he likesJohn Hancock Disciplined Value I .
The $13 billion mutual fund invests in large-cap stocks that offer attractive valuations and improving fundamentals. Financials, health care and technology are its top three sectors. It is down 5% so far this year but has returned investors an average annual 13.30% over the past five years.
A slightly more aggressive fund on his radar is theJPMorgan Intrepid Growth R5 . As its name indicates, the focus is primarily on large-cap growth companies. The $1 billion fund's top holdings areApple ( AAPL ),Microsoft ( MSFT ) andGilead Sciences ( GILD ). The fund is off 1% year to date, but it boasts an average annual return of 15.23% for the past five years.
In addition to mutual funds, Ledwith uses ETFs to take opportunities in a more tactical way, such as investing in Europe, he explains.
Asset allocations change as the client advances in age, his financial situation changes or major life events take place.
A couple near retirement will have a more conservative allocation than a young person with a long time horizon.
A major concern at that point is making sure the money will last. "The pre-retiree is super scared of losing their money. It's the height of their fear," said Ledwith. He suggests diversifying a portfolio with tax-free bonds and dividend-paying stocks, and managing the risk to extend the timeline.
In the muni arena, Ledwith likesNuveen High Yield Municipal Bond I . The $11 billion fund has a yield of 5.73% and is up 2.46% this year.
Ledwith uses the mutual fund "primarily for the income portion of a portfolio and looking for tax-free income." To diversify the muni allocation, he usesInvesco High Yield Muni A .
The $7 billion fund yields 4.12% and has returned 3.59% this year, with an annual average of 6.38% over the past five years. "If we had a spike in interest rates, I feel like the high-yield muni space would be a great place to be because they have a higher coupon."
With life expectancy getting ever longer, financial advisors need to not only preserve the retirees' funds but also make sure that they last throughout the retirement years.
"Recent research came out that talks about one of the best strategies for increased life expectancy and inflation, (which) is not necessarily to decrease equities as much as what was first thought," said Charles Bennett Sachs, principal and wealth advisor at Private Wealth Counsel.
That's why for people near retirement, Sachs fills the need for growth with an allocation of up to 40% in stocks. Within that allocation, he will diversify between large-, mid- and small-cap stocks as well as dividend-paying stocks. He'll also put about 30% of the equity allocation in international stocks, including some emerging markets.
In addition to asset allocation, "asset location" is another important element to consider, says Jeanne Fisher, financial advisor with ARGI Financial Group. "We pay close attention to putting a specific investment in a specific taxable account."
For example, she would put emerging-markets investments into an IRA or a Roth IRA to maximize the growth opportunities that such an investment offers on a tax-free basis. "We prefer that bonds and other higher-yielding products are put in tax-free accounts like IRAs so that the income distributed is not taxed in the year the distributions happen.
"It's important for every investment manager to have a set of principles on which they rely," she said. "I know for us those primary principles are to control the things we can control. We can control risk, cost and taxes to a certain degree ... so we start with those principles with any client that we meet with."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
