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Best Investment Strategy For 2011 and Beyond
The best investment strategy for 2011 and beyond will vary from traditional investment strategy for good reason. Today’s investment scene and economic conditions are anything but normal. Here we look at today’s exceptions to the norm and the best ways to protect your investment portfolio going forward.
The best long term investment strategy typically recommended in the past for average investors: allocate about 55% to stocks and 40% to bonds, with the remainder going to safe investments. Sometimes real estate or gold were 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 headed where few of today’s investors have ever been before.
The good news is that average investors can put together an investment strategy best suited to the new economic reality by simply investing in mutual funds. All five of the above investment options and more are available in funds. Plus, funds come complete with professional money management and plenty of flexibility. Once you’re with one of best fund companies you can easily make changes to your portfolio free of charge. So, let’s take a look at some of the exceptions to the norm 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 don’t fluctuate in value. The best in class here for most investors is still money market funds, where the interest you earn automatically changes with interest rates. Thirty years ago interest rates peaked and have since basically been falling. Then, you could earn close to 20% with high liquidity and safety in a money fund. As 2011 unfolds you’re looking at more like.1%. Both of these 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 funds.
In pondering your best investment strategy with bond funds picture yourself skating on thin ice. That’s what people who loaded up on bond funds to get higher interest income for 2011 and future years are doing. Lighten up here in general and avoid or get rid of long-term bond funds. They pay higher dividend yields (interest) but will take a major hit when interest rates head north for real. The extreme situation here has been bond prices, which became very high as a result of investors bidding up prices in a bizarre low-interest-rate environment. The best investment options here for most folks are short-term and intermediate-term bond funds. You will make less interest income vs. long-term funds, but you will have much less exposure to losses if the ice cracks and bond prices tumble.
The financial crisis and recession are officially over, but the stock market hesitates in its attempt to reach new highs for 2011 and beyond. Economic growth has been in question as unemployment stubbornly remains at high levels relative to the norm. This situation is unusual for an economic recovery; but don’t speculate about 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 U.S. companies vs. smaller less-stable companies that pay little in the way of dividends. Then diversify even further with international funds to spread out your risk. In this way you will participate if stocks continue to struggle upward, but you shouldn’t get hammered too severally if they don’t. Your best stock strategy if you lean to the conservative side is to lighten up on diversified stock funds in general.
As a financial planner I often recommended both gold funds and real estate funds to average investors, even when traditional investment strategy all but ignored these investment options. Both of these funds add additional diversification and balance to a portfolio. Both have also experienced changes in character in recent times that deviates from past norms. For years real estate funds were steady performers and paid handsome dividends. They were clobbered in the recent financial crisis and recession. Even with a 4 ½ % mortgage rate the real estate sector lacks gusto in turning around, but at least realty prices are not excessively high. The best investment strategy here if you believe 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 last extreme in today’s investment scene, precious metals. If you think that today’s infatuation with gold is normal, here are some historical lows and highs for an ounce of gold, in round numbers, you should 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 glittered, with its price pushing through $1400 in December of 2010. In that same time period 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 today’s prices. Your best investment strategy is to cut back if you have money here, and to stay away if you don’t. Gold has become a speculation vs. a traditional hedge against inflation, which is presently mild by any standard.
Getting more aggressive is sometimes the best investment strategy… like when prices are hitting extreme LOWS in the investment markets. For 2011 and beyond it’s best to focus on the extremes that could spell trouble in the future as they unfold… like extremely low interest rates suddenly climbing significantly. Protect your investment portfolio with a good defense, diversify across the board to deal with uncertainty, and live to invest more aggressively another day.
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