The how to invest puzzle for 2011 will require some basic investment strategy as well as a feel for the investment landscape. Then, you’ll need to know where to invest to best put this strategy to work. Here we keep it simple so you can invest with ease and confidence in 2011 and the years that follow.
So, what’s special about how to invest for 2011 and beyond? When you can get a mortgage at 4% but can’t find a safe place to invest and earn 1% with safety, times are very unusual. When the government plans to stimulate a sluggish economy by lowering rates even more, they’re trying to push a soggy noodle. In 2011 and beyond you’ll want to invest with caution and diversify across the board. That’s the best investment strategy in times of high uncertainty.
Where can you invest and get the diversification you need? The world’s simplest answer is to invest in mutual funds. There are primarily 3 basic types of funds and you should invest in all 3 kinds: money market, bond, and stock funds. But be careful about how to invest in the bond category (more later). Each fund is a diversified portfolio of securities managed for investors by professionals. And all funds state their objectives up front, along with a description of where and how the fund invests your money.
Your goal for 2011 and beyond should be to invest in and hold funds in each category in a proportion that suits the overall level of risk you can live with. For example, if you are relatively conservative you might want to invest equal amounts in each fund category. You will then be diversified within each fund, plus across the board in the three major asset classes: money market securities, bonds, and stocks.
Now, how to invest and where to invest amounts to picking funds from each of the three types. Money market funds are very safe, pay interest in the form of dividends and do not fluctuate in value. Bond funds have moderate risk, do fluctuate in value, and offer higher interest income. Stock funds have higher risk and fluctuate in value even more. You invest in them to earn higher potential profits.
How to invest in money funds: your main decision is taxable or tax-exempt. If you are in a higher tax bracket consider tax-exempt (except when investing in tax-favored accounts like an IRA). How to invest in bond funds: your critical decision here is long-term vs. shorter-term bond maturities in the fund portfolio. Avoid long term bond funds in 2011 and beyond, even though they pay higher dividends (interest). Bonds will lose value when interest rates rise. Long term bonds will get hit the hardest. Short-term funds will be much less vulnerable. The ideal bond fund will hold bonds with an average maturity of 5 to 7 years.
How to invest in stock funds: invest in both domestic (U.S. stock) and international funds to increase diversification. Don’t be too aggressive, and favor equity (stock) funds that invest in large-company dividend-paying stocks. These are less volatile than growth funds and a 2% or 3% dividend is attractive as a kicker when you consider today’s interest rates.
Where to invest in funds: I strongly recommend the major NO-LOAD fund families like Vanguard, Fidelity and T Rowe Price. You can save thousands of dollars over the years on sales charges (no-load funds have none) and expenses (they can be much lower than average). How to invest for 2011 and beyond: diversify across the board in mutual funds and keep your cost of investing as low as possible.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.
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