Best Mutual Funds Beyond 2010
March 31st, 2011 | Author: weissheiss
When looking for the best mutual funds to invest in smart investors look 6 months to a year down the road. The best funds beyond 2010 might surprise you because this time around things truly are different when compared to the recent past.
At mid-year 2010 bond funds had been very popular with investors and proved to be some of the best mutual funds for 2010, year to date. Bond funds had become extremely popular for at least two reasons. First, interest rates at the bank and in money market funds were dismal. One-year CD’s were paying less than 1% and money market funds and savings accounts were paying next to nothing. Meanwhile, bond funds were returning 5 to 10 times as much. Second, investors were afraid to own riskier investments like stocks, stock funds, and real estate.
Bond funds might not be among the best mutual funds beyond 2010. The world of finance faces uncharted waters with interest rates near historical lows in a sluggish economy. The U.S. (Federal Reserve) can no longer stimulate growth in the economy by lowering interest rates because short-term rates for safe investments like T-bills are approaching ZERO. Eventually rates will rise and bonds and bond funds will be poor investments.
The reason: when interest rates go up the value or price of bonds will fall, period. Bonds trade in the open market and have a fixed interest rate that never changes for the life of the security. When rates go up this fixed rate becomes less attractive and investors sell existing bonds, sending prices lower.
The level of interest rates truly makes things different this time around and leaves investors large and small in a quandary. Higher interest rates will hammer bonds and bond funds; and will also work against stocks and stock funds in general as higher rates hurt corporate profits. If real estate investing activity is sluggish when a 30-year mortgage can be had at 4.5%, higher rates will only work against investors to increase the cost of financing properties.
Money market funds could be some of the best mutual funds beyond 2010 by default. When interest rates go up so do the dividends they pay. For example, if rates go up 3 percentage points or more over the next couple of years, these funds should pay a safe 3% or more. This is not a great return, but it beats losing money in general diversified bond funds or stock funds.
In search of the best funds beyond 2010, this leaves us with one basic remaining type of fund to consider: specialty or specialized funds. These funds do not engage in general diversification in stocks and bonds, but rather they focus on specific sectors or niches like gold stocks, emerging markets, commodities, or foreign stocks and bonds. There are hundreds of specialized funds to choose from in the form of mutual funds or exchange traded funds (ETFs). Some of these are bound to be tomorrow’s big winners. After all, if investors are selling stocks and bonds in general, this money will flow into some alternative investments or specialized niche and send prices up.
Your best mutual funds 2010 and beyond investment strategy: cut your exposure to general diversified bond funds and stock funds, and add a variety of specialty funds to your portfolio. At the same time, do not avoid money market funds. When interest rates go up, a portfolio of general diversified bond funds and stock funds will not be as rewarding as it has been traditionally. With interest rates near zero and economic growth questionable, investors will need all the diversification they can get.
Posted in Money Market Funds | 
Tags: Best Mutual Funds, Bond Funds, Bonds, Different This Time, Federal Reserve, Interest Rate, Money Market Funds, Sluggish Economy