Article from CNN Money
My IRA currently contains five mutual funds: American Funds Balanced, American Funds Investment Company of America, American Funds American Mutual, American Funds Fundamental Investors, and American Funds New Perspective. The fund fees are very high. Can you offer a safer, more non- volatile alternative? I not looking to make a killing on these funds, but I do feel that someone living on a fixed income should not be subject to the ups and downs of a volatile market. -- Susan Bendel Collins, Duncan, S.C.
The annual fees for your American Funds mutual funds, which include four equity funds and one balanced fund, are actually not that high. Four of them have expense ratios of less than 2/3 of a percent of assets and the other charges 0.8%. What is pricey is the front-load commissions you paid to invest in the funds, 5.75%. That's money you've already spent, since front loads are charged upon purchase (as opposed to back-end loads, also known as deferred sales fees, which are charged when you sell out of a fund within a certain number of years).
What's understandably troubling to you — and millions of other investors — is the wild volatility of the stock market. Truth is, three of your five funds are actually less volatile than the broad market. One way to tell is a gauge known as "beta," which measures the ups and downs of a stock's price relative to the S&P 500's movements. If a stock is more volatile than the market as a whole, its beta will register higher than 1. The beta for three of your funds, though, is well below 1. And the two other funds you own fluctuate in synch with the overall stock market (their betas are about 1).
It's important to remember that over any short-term period of time, stocks can act like a roller coaster ride. As you approach and enter your retirement years, you'll want to reduce your exposure to the stock market's potential for violent short-term swings. And striking a balance between stocks and bonds can go a long way towards smoothing out such fluctuations. Plus, the income that bonds generate is exactly what retirees need.
So to reduce volatility in your individual retirement account, you shouldn't merely switch to a different collection of stock funds. You should consider lowering your exposure to stocks. "Since you require income and not growth, I would eliminate the two lower yielding funds: American Funds Fundamental Investors class A, yielding 1.79% (ticker: ANCFX) and American Funds New Perspective class A, yielding 1.17% (ANWPX)," says Tim Ghriskey, Chief Investment Officer of Solaris Asset Management. "The other three have decent yields" above 2.25%, he says.
The problem with bonds right now is that they're offering very low yields and if interest rates rise from here, bond prices will fall — in some cases leading to losses within your overall bond portfolios. So, for now gradually shift money from some of the stock funds into high-quality securities with short-term maturities, which won't be as vulnerable to losses should interest rates climb.
Realize that this shift will lower your potential for higher returns if the stock market enjoys a revival. But the move into bonds and the diversification they offer will reduce the volatility of your IRA portfolio in the long run.
-- Allan Chernoff
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