Diversify & Conquer


Treasury inflation-protected securities. These bonds, obligations of the federal government, will pay higher yields if inflation rises, as many forecasters expect. Johnson’s firm has a policy that prohibits mentioning specific funds, but TIPS funds are available from several mutual fund families, including Fidelity, Vanguard, and PIMCO.

Mark Salzinger, who publishes the No-Load Fund Investor newsletter out of Brentwood, Tennessee, offers another way to reduce interest-rate risk in bond funds. “Fidelity’s Floating Rate High Income Fund invests mainly in bank loans,” he says. “If inflation increases and interest rates move up, the rates on those bank loans will go higher, so payments to investors will rise.”

Stay well stocked. Among stock funds, Baker suggests that a core holding might be T. Rowe Price Total Equity Market Index Fund, which tracks the Dow Jones Wilshire 5000 Composite Index and thus provides exposure to the broad market. “Cutting expenses will pay off over the long term,” he says, “and index funds tend to be less expensive than funds where the managers try to pick stocks.”

If you prefer funds that try to beat the market rather than match a broad index, you should hold several funds that buy different types of stocks. Russ Kinnel, Morningstar’s director of mutual fund research, expresses an interest in funds that hold large company growth stocks.

“I’m not arguing that large-growth is a sure-fire hit for the next 12 months,&
quot; says Kinnel, “but you ought to get a pretty good return over the next five to 10 years. The managers of large-growth funds have very small cash positions, which signals that they are finding a lot of attractive investments.” Over the last five years, large-cap growth funds have lost 8.32% per year while small-cap value stocks have returned 14.86% a year, so it may be time for the tables to turn.

Large-growth funds might get a boost from a familiar market sector: tech stocks. “If I had to pick one area for investing, it would be technology,” says Johnson. “Corporations are holding as much cash now as they’ve had in the last 45 years, and a great deal of that cash probably will go to upgrade obsolete technology. Rather than invest in a specialized technology fund, I’d choose a diversified fund with a manager who has been successful enough in picking sectors to outperform the market for the past five or 10 years.” Among Morningstar’s favored large-cap growth funds, Fidelity Capital Appreciation and Vanguard Growth Equity have substantial exposure to information technology.

Growth funds can be balanced by value funds such as Artisan Mid Cap Value and TCW Galileo Dividend Focused Fund, which are Salzinger’s selections. “Another way to diversify your portfolio,” he says, “might be to invest in a fund that holds the stocks of companies that produce commodities, such as T. Rowe Price New Era.”

Keep up with foreign affairs. Once you have determined your allocation of stock and bond funds, the third leg of the stool is international investing. “We don’t want to have all of our eggs in the U.S.


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