Diversify & Conquer - Page 2 of 6

Diversify & Conquer

which assures you’re buying when stocks are low as well as when they’re high. Such long-term perseverance pays off: Fidelity Destiny II, for example, has returned nearly 13% per year for the last 15 years. With such results, an initial $10,000 investment would have grown to more than $60,000.

Make combination plans. Historically, investors seeking double-digit returns have found them in stock funds rather than bond funds. Nevertheless, a truly diversified portfolio will include some bond funds, which held up well while stocks plummeted from 2000 to 2002.

For instance, Bernee and Hillary Dunson of Atlanta, both 40, hold a mix of investments that includes individual stocks and real estate. “I also have a retirement plan at my dental practice,” says Bernee. “There, I invest in mutual funds, which my wife and I select.” Hillary says the retirement plan’s largest holding is Buffalo High-Yield Fund. This fund, which primarily invests in “high-yield” (low-rated, or junk) bonds, delivered positive annual returns throughout the recent bear market for stocks and shows an annual return of about 9% for the last five years.

Portfolio diversification also affects how the Dunsons invest for their two young children, who are literally model youngsters. The children’s photos are used to promote Bernee’s dental practice. Not only does this provide a nice tax break (deductible payments for the dental practice and tax-free income to the children), it also gives the younger Dunsons money to invest.

“The money has been invested in Roth IRAs,” says Lee Baker of Apex Financial Services in Tucker, Georgia, who serves as the Dunsons’ financial planner. In 2005, up to $4,000 worth of earned income can be contributed by each child. Investment earnings are not taxed and, after age 591/2, withdrawals will be tax-free.

“The Roth IRA money is invested in mutual funds,” says Baker. “The same is true for each child’s 529 plan.” Again, 529 plans offer tax-free investing, provided that the money is ultimately used for higher education.

For the young Dunsons, Baker recommends Virginia’s 529 plan, choosing mutual funds run by American Funds. “Their money is in Investment Company of America for domestic stocks, New Perspective for global stocks, and Bond Fund of America,” Baker says. “This is a nice mix of funds from a company that has done a good job of keeping costs low and providing excellent returns. The Roth IRA money is invested in American Funds Growth Fund of America, which rounds out their portfolios.”

Hedge your bond bets. Investors seeking to include bond funds in a diversified portfolio need to be careful these days. “With a flat yield curve, you might be better off with short- and intermediate-term bond funds,” says Johnson. “There are concerns that long-term interest rates will rise.” That is, short-term bonds now yield nearly as much as long-term bonds. If you invest in long-term bond funds to get a little more yield, you’ll risk losing principal, because long-term bonds lose value when interest rates rise.

“I also like TIPS funds,” says Johnson, referring to mutual funds that invest in