The five best stock funds to hold in 2011
After the wretched stock market returns of the past decade, you can hardly fault older investors — especially those whose investment horizon is not measured in decades — for shunning stocks and seeking shelter in bond funds and bank certificates of deposits.
But with CD yields at microscopic levels, and inflation and interest rates highly likely to rise in the near future, keeping your nest egg ahead of inflation calls for investing a sizable chunk in stocks or stock funds.
The good news is that some of the very cheapest stocks today also happen to be the biggest and strongest companies — those least likely to lose you money should the economy weaken.
So here are five stock funds I think make up a smart stock portfolio for 2011, along with suggestions for what portion of your portfolio to invest in each.
Large cap funds
Primecap Odyssey Growth (1-800-729-2307) is my favorite U.S. stock fund. It’s a relatively new fund, but it employs the same methods and is run by the same managers who have piloted Vanguard Primecap with superb results since 1984.
Vanguard Primecap has returned an annualized 12.4 percent over the past 20 years through mid-November. That’s an average of 3.5 percentage points better per year than Standard & Poor’s 500-stock index. The fund ranks in the top 1 percent among large-company-growth funds over the past ten and 20 years.
Unfortunately, Vanguard Primecap is now closed to most new investors, but Primecap Odyssey Growth is open. The fund has about 25 percent of assets in technology stocks and 40 percent in healthcare. These are sectors that continue to grow rapidly even during an anemic economic recovery. Annual expenses are just 0.71 percent.
Like Primecap, Fidelity Contrafund (1-800-544-6666) invests in large company growth stocks. Manager Will Danoff has steered Contrafund since 1990. Over the past 20 years, the fund returned an annualized 12.8 percent, even topping Vanguard Primecap by a small margin.
In general, Fidelity isn’t my favorite fund firm. The atmosphere is cutthroat — managers either perform or they’re fired. But a few managers, including Danoff, have thrived in this ruthless environment.
FPA Crescent (800-982-4372) is an entirely different kind of fund. Manager Steven Romick is a dyed-in-the-wool value investor who worries constantly about what might go wrong with the global economy or his fund’s investments.
Consequently, he rarely invests more than 50 percent of the fund in stocks. The rest goes into bonds and cash. Romick hunts everywhere for value. Lately, he has found himself in unfamiliar territory — loading up on large company growth stocks.
Romick’s innate conservatism has paid off. Over the past 10 years, the fund returned an annualized 12 percent — compared with less than 1 percent annualized for the S&P 500. This fund is so good that for some seniors it could make a one-fund portfolio. The only negative: Romick tends to lag in bull markets.
How to allocate
For a simple portfolio, I’d recommend putting 25 percent of your stock money in each of the above three funds.
Then invest another 15 percent in Oakmark International (1-800-625-6275). Manager David Herro is a canny veteran, who still loves traveling the world hunting for stock investments. He has piloted the fund since its inception in 1992.
Over the past 15 years, Oakmark International has returned an annualized 10.7 percent. That’s 5.5 percentage points per year better than the MSCI EAFE foreign stock index, and puts Oakmark International into the top 1 percent among foreign funds. Herro’s record has been just as good in recent years relative to his peers.
However, Herro and his team don’t own many emerging markets stocks. That’s why I think you should invest the final 10 percent of your stock money in T. Rowe Price Emerging Markets Stock (800-638-5660). Baltimore-based T. Rowe Price has long boasted first-class foreign funds, and Emerging Markets Stock is a gem.
Over the past 15 years, the fund has returned an annualized 10.9 percent, beating the MSCI Emerging Markets Stock index by an average of 1.5 percentage points annually. I’m a strong believer in the emerging markets story. These countries will likely continue growing rapidly for many years to come.
What about the rest of your investment portfolio, beyond stocks? Almost all older adults, I think, should have at least 40 percent of their money in bonds. Most will do better with 50 or 60 percent in bonds.
I wrote about bond funds in my column last month. For those who missed it, T. Rowe Price offers fine Maryland and Virginia municipal bond funds, which yield about 4 percent annually free of federal and state income taxes. These are great for investments in taxable accounts.
For investments in tax-deferred accounts, I’d divide your bond money evenly among the following bond funds: DoubleLine Total Return (877-354-6311), Pimco Unconstrained (800-426-0107), Pimco Diversified Income and Fidelity New Markets Income.
Steven T. Goldberg is a freelance writer and investment advisor in Silver Spring, Md. He welcomes reader questions. E-mail firstname.lastname@example.org or write: Steven Goldberg, 9005 Woodland Dr., Silver Spring, MD 20910. You may also call him at (301) 650-6567.