Funds That Rev Up Your Portfolio - Page 2 of 5

Funds That Rev Up Your Portfolio

is more than 11%. Stock funds may have reached a point where there’s more upside than downside–assuming no further bad news rattles Wall Street in 2003. “The base is slowly being built for the beginning of a gradual move towards the next bull market,” asserts Jerry Wade, a financial planner in Minneapolis.

On the other side of the equation, bond funds may have reached a peak–Wade suggests that Treasury bonds might be in a “bubble stage.” Bond prices rise when interest rates fall, and rates are now at their lowest levels in decades. If rates inch up, bond prices will fall, as was the case in 1994 and 1999.

With this backdrop, where do you go from here? Do you stick with stock funds, hoping for the long-awaited rebound? Or do you bet on bond funds, which have rewarded investors recently? One guide that can help you make such investment decisions is our list of the top 90 mutual funds, ranked by their one-year average return–all of which have outperformed the S&P 500 in 2002 (see chart). It’ll help you make smart investment moves regardless of your stage in life.

After 26 years with the local phone company, working his way up the ranks to a management position, Richard Vaughn of Pasadena, California, took advantage of a buyout offer and retired last year so he could devote more time to his antique car collection. “Not only that, I decided against taking a pension,” says Vaughn, 47. “Instead, I took a lump sum, which I rolled into an IRA.”

Vaughn hopes to let his IRA build until age 591/2, when he can withdraw funds without paying a 10% penalty tax. “I lost money in 2002,” he says, “but my losses were less than the market’s. Over the next 12 years, I think I’ll do better than I would have if I had taken a pension.”

Arnetta Tolley, an investment advisor at the Pasadena office of Edward Jones Investments–a financial services firm based in St. Louis–helped Vaughn put together a diversified portfolio. “About one third is invested in cash and other fixed-income vehicles,” she says. “That includes Lord Abbett Bond-Debenture Fund, which mixes high-quality and investment-grade bonds.” Cited by Morningstar for its “excellent risk-reward profile,” this fund recently yielded nearly 9%.

The other two thirds of Vaughn’s portfolio consists of stock funds, including two Van Kampen growth funds [Enterprise (ACENX) and Emerging Growth (ACEGX)] and Lord Abbett Affiliated (LAFFX), a value fund with a 10-year return of more than 11% per year. “Growth funds have been performing at a negative recently,” says Tolley, “so this may be a good time to pick up quality investments at a low price. Stock prices already reflect bad news, but we think there’s a lot of good news on the horizon: low inflation, low interest rates, and relatively low unemployment.”

Having a balanced portfolio helped Vaughn keep his losses to about 9% last year, compared to the broad U.S. stock market’s 20% drop. He’s poised for a favorable recovery in