With stocks and bonds both pricey the question of where to invest money for 2015 and beyond becomes a major issue. Here we look at where to invest money in stocks, bonds, and funds by focusing on pitfalls to avoid in 2015, 2016 and perhaps beyond.
Stocks have recently hit all-time highs and this gets lots of investors excited. Instead of throwing more money at the market, the average long-term investor should be concerned with where to invest money in stocks. This is most easily done by focusing on which stocks and stock funds to avoid. Shy away from low-cap stocks, popular glamour stocks, high-tech growth, and penny stocks in 2015 and beyond. These were yesteryear’s answer to where to invest money in stocks for big gains.
When the stock market runs out of steam, these will likely be the big losers. They pay little if anything in dividend income and are more volatile than the market in general. Volatility is not your friend in a bear market. Go with well established, high-quality growth and income (or equity income) stocks and funds with good track records for paying dividends. The simplest answer to where to invest money in stocks (for the average investor) is to go with a large-cap stock fund like an S&P 500 Index fund. That way you’re invested in 500 of the largest, best-established companies in the USA. Dividend income of 2% or more is still available in some of these funds.
The flipside of stocks is bonds, and few average investors understand the risks associated with bonds and bond funds for 2015 and beyond. With interest rates near all-time lows, bond prices are near all-time highs. When rates climb, bonds and bond funds will lose money. The question is: where to invest money in bonds (for higher income) while keeping the risk at acceptable levels. Since most average investors hold bond funds vs. individual bond issues, we’ll focus on funds here.
The primary areas of concern here are bond quality and time to maturity (long-term vs. shorter-term) for the bond fund portfolio in question. In terms of quality, avoid the highest quality (US Government bond funds) and avoid the lowest (high-yield or junk bond funds). The former pay too little in income, and the latter carry too much risk and price volatility for the average investor.
In terms of time to maturity, avoid short-term funds because their low dividend income is not justified by the fund costs involved. And long-term bond funds are definitely not where to invest money, even though their 3% or so dividend income might look relatively attractive. Long-term spells “high risk” as interest rates rise. If rates go up to over 6% on high quality long-term bonds, long-term funds could lose HALF of their value.
In bond funds for 2015 and beyond, the answer to where to invest money is to go with medium to high quality, intermediate-term funds. This way you can earn dividend income of 2% to 3% if you keep your costs of investing low, without taking unnecessary risks. Also pay attention to the costs, expenses and sales charges involved with both stock and bond mutual funds. Why pay 5% or more for sales charges and/or 2% a year for fund expenses, when sales charges can be avoided with no-load funds; and yearly expenses can be less than 1% a year?
The average long-term investor needs both stock funds and bond funds in order to have a portfolio that balances out the risks inherent to each of these asset classes. Where to invest money in both areas could be a new challenge in 2015 and beyond. If interest rates take off, not knowing where to invest money could prove very costly. I hope you find these suggestions helpful.