3/25/2014 1:30 AM ET|
9 great funds for young investors
Many millennials remain understandably wary of the stock market. But for young people with time on their side, these mutual funds present good long-term options.
The Great Recession has scared nearly an entire generation away from stocks. According to a 2013 survey by Wells Fargo, more than half of people age 22 to 32 lack confidence in the stock market.
Anton Bayer, chief executive of Up Capital Management, a registered investment adviser in Granite Bay, Calif., says this attitude is understandable given that young people have seen nothing but a high-volatility market during their investing lifetime.
"Their approach is 'If I don't do anything, I won't lose money,' but that's not good enough," Bayer says. "They need to engage. In order to build wealth, you can't be passive."
Mutual funds can be the best way for young investors to get in on the action. A single investment can include a diversified portfolio at a relatively low cost. Plus, Bayer points out, "in times of storms, mutual funds can weather the ups and downs a little bit better than a few individual stocks."
Build your core
A solid investment base starts with index mutual funds, which mimic the returns of a broad market segment. These funds are easy for young investors to comprehend because there are neither exotic investment strategies to unravel nor the stock-picking whims of fund managers to decipher.
"A very simple, no-load index fund is the cheapest and easiest way to go," says Lauren Locker, a financial planner based in Little Falls, N.J. "It'll let you hit a little bit of everything, and you don't really have to pay too much attention to it."
Locker recommends Vanguard Total Stock Market (VTSMX). The majority of its portfolio (72.2 percent) is invested in giant- or large-company stocks, but it also dips into medium-, small- and micro-cap stocks. Its benchmark, the CRSP U.S. Total Market Index, is made up of about 3,600 U.S. stocks.
Over the past five years, Vanguard Total Stock Market has gained 26.0 percent annualized, ranking it in the top 12 percent of its "large blend" category. (Large blend funds invest in both growth and value stocks and are fairly representative of the entire stock market. All returns and related numbers are as of March 5.) The fund's expense ratio is a very low 0.17 percent per year. It requires a minimum initial investment of $3,000.
One note on fund performance figures: Stocks have been on a tear since the brutal bear market ended in March 2009, resulting in outsized gains during the past five years. Don't expect these heady returns to continue indefinitely. Over the long term, the average return of the stock market is closer to 10 percent per year.
Investing rookies might also enjoy the set-it-and-forget-it benefit of target-date funds. Get started by choosing the year in which you want to achieve your investing goal, such as retirement. Then, pick a fund with that year in its name. The managers will build the fund's asset allocation to suit your time horizon and dial down the risk as the fund's deadline approaches.
Three of the biggest fund families -- Fidelity, T. Rowe Price and Vanguard -- offer quality target-date options, says Locker. Vanguard boasts the lowest fees. The Vanguard Target Retirement 2050 (VFIFX) fund, suitable for a 29-year-old aiming to retire at age 65, has an expense ratio of just 0.18 percent. Fidelity's and T. Rowe's 2050 funds charge 0.82 percent and 0.78 percent, respectively.
T. Rowe Price Retirement 2050 (TRRMX) has the best performance record of the three, earning 23.9 percent annualized over the past five years, keeping pace with the widely followed Standard & Poor's 500 Index ($INX) and topping Vanguard 2050 by an average of 2.0 percentage points per year and Fidelity Freedom 2050 (FFFHX) by an average of 2.7 points per year.
Instead of the target-date approach, Bayer prefers using balanced funds, which generally invest in a mix of stocks and bonds. "These are very useful tools for younger investors because they're the whole package," he says. Over time, he suggests switching from more-aggressive balanced funds to more-conservative balanced funds as your investment needs change. For example, opt for the aggressive fund when you're young and have time on your side, then move into increasingly conservative balanced funds as you approach retirement.
Bayer likes Invesco Equity and Income (ACEIX), which Morningstar categorizes as "aggressive allocation," meaning the fund typically has 70 percent to 90 percent of its assets in stocks. He might trade it for a "moderate allocation" fund with 50 percent to 70 percent in stocks, such as Hartford Balanced (ITTAX), to ease up on risk. Unfortunately, both funds' Class A shares come with a 5.5 percent load -- a sales charge that can really take a bite out of your returns. But if they're available through your 401k, you may be able to skip that extra fee.
For a no-load balanced option, consider FPA Crescent (FPACX), a moderate allocation fund and member of the Kiplinger 25, a collection of our favorite no-load mutual funds. Manager Steven Romick is free to invest almost anywhere and in a range of different assets, from stocks and bonds to currencies and subprime home loans. But with his strategy of seeking out-of-favor stocks, he has found few compelling opportunities during the market's recent run. The fund currently has a portfolio that's 44.1 percent cash.
It has earned 16.7 percent over the past year, better than its peers by 4.0 percentage points, but it trailed the S&P 500 by 7.6 points. Long-term returns are more impressive: Over the past 15 years, it has gained an average of 9.9 percent a year, beating the S&P 500 by an average 5.4 percentage points a year and leading its category. The fund charges 1.14 percent in annual expenses and requires $1,500 to start.
Bet on innovation
After you settle on your core funds, you may want to devote a portion of your investing dollars to sector funds that offer the potential to outperform the broader stock market. These funds can (and probably will) have more ups and downs than core funds, but young investors with ample time to recover from investing stumbles can afford to take on the added risk.
Bayer suggests looking at the technology and biotech sectors -- both top performers over the past few years. What do these sectors have in common? Innovation. "They are introducing new products, new services, something that's allowing them to introduce new sources of revenue," says Bayer. "Buying early in innovation is a huge opportunity."
He recommends Fidelity Select Biotechnology (FBIOX). Manager Rajiv Kaul seeks companies with strong pipelines and breakthrough innovations on the horizon. Over the past three years, this Fidelity fund has ranked tops among health funds with a return of 47.4 percent annualized, beating its peers by an average of 26.9 percentage points per year and the S&P 500 by an average of 32.6 points per year. It requires a minimum initial investment of $2,500 and charges 0.79 percent in annual expenses.
Ivy Science and Technology (WSTAX) is a load fund that Bayer thinks is worth the cost. It has a sales charge of 5.75 percent on top of its 1.37 percent annual expense ratio, but the fund has returned a whopping 46.7 percent over the past year, 22.4 percentage points better than the S&P 500 and 10.7 points more than the average technology fund. Over the past ten years, it has outperformed 97 percent of its peers. Top holdings include household names Google (GOOG) and Facebook (FB) as well as lesser-known companies, such as Cree (CREE) and Aspen Technology (AZPN). The minimum initial investment is $500.
More from Kiplinger
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Wow. I'm about to get racked over the coals, anyway....
I came here to comment that I was impressed to see the no-load/low cost fund companies like Vanguard, TRowePrice, and Fidelity highlited. There is absolutely no reason to pay high fees to a fund company.
Don't forget to inform young investors that there is a major fall coming to the market. They'll be a small crowd anyway since they're living with their parents and riding their health insurance policies.
Oh, and BTW they might need to locate one of the few jobs out there before thinking of investing in something besides a smartphone.
Wait a minute ! Aren't millennial's burdened with high student loan debt? Isn't this the group that can not find work in their chosen profession ? Aren't these the folks who ARE NOT signing up for Obamacare because the COST IS TOO DAMN HIGH ? And Sebelius said there would be no extension beyond 3/31/14- WHAT A LIAR!!!!!!!!!!!!!!!!!!!! and this extension won't make a bit a difference in increasing enrolment numbers WHO ACTUALLY PAID THEIR INSURANCE PREMIUM.
FIRST-they have to have a good job, making a decent wage before any investing or saving.
Second- they have to get rid of all that student debt; then they'll be able to save a little.
But the demo-cant's want you dependent on the government, in debt to them, so that they can run your life the way 'they see fit' instead of EMPOWERING THEM to be successful, giving them the opportunities that I had, my parents had, their parents had and so on....that made this country the best on earth.
As for my children, they understand the value of education, saving, work, and being prepared. I sincerely hope none of you instill your negative "why bother" attitudes in your children. If so, we as a society are really in trouble.
Well, the young voted for it twice. You get what you vote for. Price is high in the market now, wonder if they got in when it was low?
Nine great funds for young investors?
There should really be 10. I.E., They should try (to their best ability that is) to keep this governments' hands out of their pockets. Invest in Silver /Gold. Why, because at 17 trillion in debt, and counting, what do you think this dollar is worth, and will be worth in the future? Do YOU really want more ( paper ), AS IN STOCKS to hold on too? Good luck to all young investors.
If Republicans get the House and Senate and the Presidency young people will be lucky to get a pay check they can live on. Gas will be $12 a gallon, drinking water will be sold only in bottles at $5 a pint (pollution ruined the city water and wells), Medicare, social security will be gone so better save all of it...that min wage job paycheck.
No unemployment, worker's comp. in fact after disbanning OSHA and the EPA if you don't have leukemia from oil spills you will get AIDS from hospital blood.
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