Investing Advice

Mutual Funds and Asset Allocation

Ask any financial planner about mutual fund investing and they will give you a lesson on asset allocation (not to be confused with diversification, although many investors do use the terms interchangeably). They will advise you to put part of your money in a good bond fund, part in a money market fund that invests in U.S. treasuries, and the remainder in a stock market index fund. How much in the stock fund?

Some experts say the percent of your investments that should be invested in the stock market should be no more than the number 100, minus your age. Some say 120 minus your age, and others use the number 125. I agree that this will protect your money, but I guarantee that if you listen to such nonsense, you will never reach anything but very modest investment goals.

I'll bet you didn't know that bonds have bear markets too. In the past 28 years, 8 have been losing years for bonds, and from Dec '76 to March '80, even U.S. treasuries dropped 33%. As recently as 1994 and 1995, the average bond fund lost money.

You see, when interest rates go up, nobody wants existing bonds, even government bonds, because they pay the old, low interest rates. To sell a low interest rate bond, the price of the bond has to be cut to a discounted price that gives an investor the same effective percent return that a new bond does.

But I'm drifting away from our discussion on asset allocation. Let me give an example of how much money you may be throwing away by following the expert's advice on asset allocation.

If you had put $10,000 into an S&P index fund on Dec 31, 1980, it grew at an average 18.5% to $295,883 over 20 years.

If you had been more conservative and put 3/4 of your money in an S&P fund and 1/4 in a government bond fund, your average 14.8% grew to only $152,000, passing up $143,000 in profit.

If you had invested $10,000 in the S&P 500 in 1974, in 15 years it would have grown to $612,543. If you had been conservative and placed half of your money in a government bond fund, your investment would only be worth $353,251 in 1999.

As we saw in this book's introduction, from 1926 to 2000, T-Bills returned 1.67% (total $3.46 on $1 invested) long term government bonds 4.28% ($23.17), corporate bonds 6.05% ($81.90), and $1 in stocks grew to $2,845 (with dividends reinvested). If your time horizon, which is the number of years before you need your money, is less than 10 years, then asset allocation does make sense. Otherwise asset allocation is for fuddy-duddies, not smart investors.

10 Largest Funds

 • Fidelity Magellan
 • Vanguard 500 Index
 • Investment Company of America
 • Washington Mutual
 • Fidelity Growth and Income
 • Growth Fund of America
 • Fidelity Contra Fund
 • New Perspective
 • Euro-Pacific Growth
 • Janus

Other Stock Market Basics Topics:

  1. Mutual Fund Advantages
  2. History of Mutual Funds
  3. NAV
  4. Dollar Cost Averaging
  5. General advice about choosing a fund
  6. Mutual Fund Ratings
  7. Evaluating Mutual Fund Investment Risk
  8. Mutual Fund Share Classes
  9. Mutual Fund Fees
  10. The Mutual Fund Prospectus
  11. How important is the manager's length of experience?
  12. Why is the prospectus hard to understand?
  13. Mutual Fund Annual Report
  14. Comparing your fund to the competition
  15. Comparing funds on an after-tax basis
  16. Average Return on Investment
  17. How Not to Pick a Mutual Fund
  18. Cashing in Your Fund
  19. When to Sell Your Fund
  20. Mutual Funds and Asset Allocation
  21. When to get started with a mutual fund
  22. Types of Mutual Funds
  23. Value Stock Funds
  24. Growth Stock Funds
  25. Small and Micro-cap Stocks
  26. Mid Cap
  27. Large Cap Companies
  28. Income Stock Funds
  29. Mutual Fund Index
  30. Enhanced Index Funds
  31. Sector Mutual Funds
  32. Stock Market Sectors
  33. Defensive Stocks
  34. International Funds
  35. Real Estate Mutual Funds
  36. Socially Responsible Funds
  37. Balanced Funds
  38. Tax-Efficient Funds
  39. Bond Convertible Funds
  40. Junk Bond Funds
  41. Mixtures of stock types
  42. Closed End Funds
  43. Exchange Traded Funds (ETF’s)
  44. Stock Picking Strategy - Picking your own stocks?
  45. Fund names, and what they really invest in
  46. How to get started
  47. Where can I start investing with no money?

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