Best investment strategy for 2011 and beyond
The best investment strategy for 2011 and beyond will vary from the traditional investment strategy for good reason. The current investment scenario and economic conditions are anything but normal. Here we discuss the current exceptions to the rule and the best ways to future-proof your investment portfolio.
The best long-term investment strategy generally recommended in the past for average investors: allocate about 55% to stocks and 40% to bonds, with the rest to safe investments. Sometimes real estate or gold was thrown into the mix. For the most part, this strategy worked. For 2011 and beyond, it’s time to think twice about asset allocation and your specific investment options in the five areas mentioned above. Some are skating on thin ice; while others are going where few of today’s investors have been before.
The good news is that average investors can put together an investment strategy that best suits the new economic reality simply by investing in mutual funds. The five investment options above and more are available in funds. In addition, the funds are completed with professional money management and a lot of flexibility. Once you’re with one of the best fund companies, you can easily make changes to your portfolio for free. So let’s take a look at some of the exceptions to the rule or extremes that exist today. Then we’ll suggest changes to consider for 2011 and beyond in terms of mutual funds, starting with safe investments and ending with gold.
Safe investments pay interest and do not fluctuate in value. The best of its kind here for most investors is still money market funds, where the interest you earn changes automatically with interest rates. Thirty years ago interest rates peaked and have basically been falling ever since. So you could earn close to 20% with high liquidity and safety in a money pool. As 2011 progresses, more than 0.1% is expected. Both rates represent DRAMATIC extremes or exceptions to the norm. Few of today’s average investors have experienced a significant upward trend in interest rates. Prepare for this possibility. Your best investment strategy here is to keep 10% to 20% in money pools.
When considering your best investment strategy with bond funds, imagine yourself skating on thin ice. That’s what people who accumulated bond funds are doing to earn more interest income for 2011 and future years. Be happy here in general and avoid or get rid of long-term bond funds. They pay higher dividend (interest) yields, but will take a big hit when interest rates head north for real. The extreme situation here has been the price of bonds, which became very high as a result of investors bidding up prices in a strange environment of low interest rates. The best investment options here for most people are short- and medium-term bond funds. You will earn less interest income vs. long-term funds, but you will be much less exposed to loss if the ice breaks and bond prices fall.
The financial crisis and recession are officially over, but the stock market falters in its attempt to hit new highs for 2011 and beyond. Economic growth has been in question as unemployment stubbornly remains high relative to the norm. This situation is unusual for an economic recovery; But don’t speculate on the future of stocks and don’t avoid stock funds. The best investment strategy here is to favor general diversified stock funds that invest in high-quality dividend-paying US companies over dividend-paying US companies. smaller, less stable companies that pay little in dividends. Then diversify further with international funds to spread your risk. This way, you will be involved if stocks continue to struggle higher, but shouldn’t be affected too much if they don’t. Your best stock strategy if you lean to the conservative side is to lighten diversified stock funds in general.
As a financial planner, he often recommended both gold funds and real estate funds to average investors, even when traditional investment strategy all but ignored these investment options. Both funds add additional diversification and balance to a portfolio. Both have also undergone character changes of late that deviate from past norms. For years, real estate funds performed consistently and paid good dividends. They were hit by the recent financial crisis and recession. Even with a 4 ½ percent mortgage rate, the real estate industry lacks enthusiasm to turn around, but at least home prices aren’t unreasonably high. The best investment strategy here if you think the industry will recover in 2011 or beyond: Put 5% to 10% in a real estate fund to further diversify your portfolio.
Now let’s talk about the latest extreme in today’s investment scene, precious metals. If you think the current infatuation with gold is normal, here are some all-time lows and highs for an ounce of gold, in round numbers, to look at. From a low of $100 in 1976…to a high of $850 in 1980…and then down to $250 in 2001. Since 2001 began, gold has shined, with a price topping $1,400 in December 2010. In that same time period the stocks struggled. Don’t push your luck in 2011 and beyond. Gold and gold funds are not a growth investment and are anything but safe at current prices. Your best investment strategy is to cut if you have money here and stay out if you don’t. Gold has become a speculation vs. a traditional hedge against inflation, which is currently light by any standard.
Sometimes being more aggressive is the best investment strategy… like when prices hit extreme lows in the investment markets. For 2011 and beyond, it’s best to focus on extremes that could spell trouble down the road as they unfold…such as extremely low interest rates that suddenly spike significantly. Protect your investment portfolio with a good defense, diversify across the board to face uncertainty, and live to invest more aggressively another day.