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6 funds for your 401k in 2013


These mutual funds are leaders in their asset classes and are solid choices for IRAs as well. If you can't buy exactly these funds, you may want to look for similar ones.

By Jeff Reeves, InvestorPlace
From http://money.msn.com/mutual-fund/


Best in class

Picking stocks is a difficult game, especially in this volatile market. But mutual fund investors with 401k plans don't necessarily have it any easier.

After all, they still have to decide which funds to buy -- and how much to put in them -- just like stock pickers. And sometimes the strategy and expenses can be just as confusing as dissecting an individual corporation's 10-K filing with the Securities and Exchange Commission.

If you're looking to take the guesswork out of your 401k in 2013, following are five individual funds that rank top of class. These mutual funds would be great additions to your 401k or even your individual retirement account, and each is representative of a specific asset class that I think you should invest in.

If you can't find these particular mutual funds in your 401k group, try to find the "flavor" in a similar investment. That way, even if you can't pick the exact list here you may be able to get similar returns in the new year.

For more on the best 401k funds for 2013, click through this slide show, published Dec. 12.


Index fund

What if you don't want to overthink and simply want to "buy the market" to get a piece of stocks in an easy and low-cost way? If that's the case, there's nothing better than an index fund, which, as the name implies, is a mutual fund that is locked into a benchmark and its constituent holdings.

Vanguard pioneered low-cost index funds, and its Vanguard 500 Index (VFINX) fund is one of the most popular products out there, with more than $25 billion under management and a rock-bottom 0.17% expense ratio. That's a mere $17 on every $10,000 invested!

Its holdings are those in the Standard & Poor's 500 Index ($INX) -- blue chips you know and love, such as Apple (AAPL) and General Electric (GE). It's easy to track your performance -- you simply watch the headline index; your fund will mirror its performance almost exactly.

Index funds are the bedrock of any good 401k because they are low-cost and because active managers have a hard time outperforming them. It might surprise you, but passive index funds regularly return more money to investors than do funds that rely on human beings picking stocks.

So don't get crazy or enamored with a manager or a strategy. An index fund keeps expenses down and performance up.

If you can't add this Vanguard fund, ask your 401k administrator for a similar index fund. Any good plan should provide these kinds of options to investors.


Small-cap growth fund

If you're a long-term investor with many years until retirement, one of the areas you might want to consider in your 401k next year is small-cap growth -- that is, smaller companies that have a lot of upside potential as they gain reach and scale. Small-cap companies can be profit powerhouses when they hit on a great new product, and even if there are some rocky market movements in 2013, you can expect smaller and more agile companies to get up to speed faster than lumbering blue chips.

Check your 401k plan for your personal small-cap growth fund options. If it's available, consider Janus Triton T (JATTX). It has earned a five-star rating from Morningstar, and its lifetime rate of return is about 11% annually.

Current holdings include machinery manufacturer Dresser-Rand (DRC), aircraft components supplier TransDigm Group (TDG) and software developer MSCI (MSCI).

Managers Brian Schaub and Chad Meade have been with the fund since 2006, so there is stability in strategy and leadership.

Janus also has no transaction costs and a reasonable expense ratio of 0.94%. That means its management fee is $94 for every $10,000 you invest.


Large-cap dividend fund

With U.S. Treasurys and investment-grade corporate bonds providing paltry yields, many investors have been looking to blue chips for income opportunities. After all, if you can get a 3% dividend in some of the most stable utility and consumer staples stocks, why settle for half that in bonds?

If you like the idea of bigger yields and don't mind the added risk of stocks, then a dividend fund should be part of your 401k holdings. One of the best -- and most widely held, with more than $2 billion in assets -- is the Fidelity Strategic Dividend and Income Fund (FSDIX).

This fund gets four stars from Morningstar. It has no transaction charges and an expense ratio of just 0.84%. That's an $84 charge on every $10,000 you have invested.

Additionally, the fund has a yield of about 2.5%, thanks to bedrock blue chips like Exxon Mobil (XOM), Verizon Communications (VZ) and Procter & Gamble (PG) in its holdings.

You can find other funds with more yield, but beware chasing large dividends in exchange for share-price declines. Fidelity Strategic Dividend and Income has a lifetime return of about 6% annually, so this is a fund that doesn't trade big dividends for underperforming stocks.

If you're concerned with income but don't want to take on undue risk, consider a large-cap dividend fund in 2013.


International growth fund

Global equity markets have seen tough times in recent years, with China in particular underperforming U.S. benchmarks like the S&P 500 Index ($INX). However, if you're a longer-term investor worried about making sure you find the right investments over the next decade, you should strongly consider investing in international growth. After all, the idea is to buy low and sell high -- not to wait for the rally and buy at the top.

One of the best international growth opportunities for 401k investors right now is the Oakmark International I (OAKIX) fund. This mutual fund has a lifetime return of more than 10% annually, a five-star ranking from Morningstar and an impressive $9 billion under management.

Because this is a "blend" fund that mixes both value and growth plays, there is some stability via international blue chips like Daimler (DDAIF), Credit Suisse (CS) and Canon (CAJ). So don't think you'll be taking a Hail Mary on the next Chinese startup with this fund.

Manager David G. Herro has been with the fund since 1992, and international equity experience is crucial to understanding global markets.

The expense ratio is a reasonable 1.06%, meaning you pay $106 for every $10,000 invested.


Bond fund

When you think about bond investing, one firm comes to mind above all others: Pimco, with its iconic manager, Bill Gross. So if it's offered, you should consider adding the Pimco Total Return C (PTTCX) fund in your 401k portfolio. This fund offers low-risk income as well as a steady foundation of growth.

Bonds are unlikely to outperform stocks, especially in this low-interest-rate environment. However, they are much more reliable in their returns -- especially when you have someone like Gross ranking the bonds based on where he can get the best yield without sacrificing a risk of default. Pimco Total Return C invests only up to 10% of its portfolio in junk bonds, which offer higher yield but greater risk, so this is one of the most stable income investments out there.

The expense ratio is a decent 1.6% -- about $160 on $10,000 invested -- and many participants must pay transaction fees. However, the performance of this fund is well above its peers and could be worth the price of admission.

If you can't add the this fund, however, I strongly advise having some kind of income fund via investment-grade bonds in your portfolio -- particularly if you are close to retirement and are as concerned about capital preservation as about growth.



By Jeff Reeves, InvestorPlace
From http://money.msn.com/mutual-fund/

How To Avoid The Hidden Tax Hits Of Owing Mutual Funds


Deborah L. Jacobs, Forbes Staff
Article from Forbes

This is guest post by Bill Harris, former CEO of PayPal and Intuit, and now CEO of the financial advisory firm Personal Capital.

As you gather various financial documents to prepare your tax return this year, take a look at your investments. Do you own any equity mutual funds? If so, you may be subject to avoidable tax hits. Not sure if your investments are costing you extra? Read on.

Beware Churning

Actively managed mutual funds tend to make a lot of trades during the year. While investment managers may try to maximize returns through frequent buying and selling, they may also be charging you for each transaction. That really adds up if the fund’s turnover rate is 100% or more. And if they’re buying and selling to the point of generating strong returns, they may also be creating taxable gains that you’ll have to pay for come April 17 (that’s when tax returns are due this year).

According to Morningstar, the ten most popular mutual funds by assets under management carried a 1.05% average annual tax cost over a five-year period.

Say you invested $100,000 over the past five years. Using a simple average of these funds’ 5-year annualized returns, your investment would have grown to $115,467 before tax. After taxes, however, your investment would be worth $106,203. That’s a difference of $9,263.

Low Turnover

Turnover is a very real threat. Let’s look at the top ten mutual funds by assets under management as reported by Morningstar. The average turnover rate is 74.4%. This means these particular mutual funds turn over approximately 74.4% of their holdings during the year.

To avoid excess transaction fees and lessen the burden of taxable distributions, some investors choose to buy index funds. Index funds track stock indices, such as the S&P 500, and therefore follow a more passive investment strategy. These can be good options, but they aren’t immune to distributions, especially when the target index replaces one stock with another. To mimic the target index, the index fund will also sell that stock, which could result in capital gains. Exchange traded funds (ETFs) pose a similar risk, but they generally carry lower fee structures, making them more attractive overall.

Tax-Managed?

Of course, some mutual funds are “tax-managed,” meaning the investment manager strategically decides which stocks to buy and which to hold based on capital gains and capital losses. The idea is to add balance and limit tax exposure. Of course, most mutual fund managers would likely sell winning stocks in order to take advantage of gains. Doing so means investment gains for shareholders, but also means greater distributions and potentially higher taxes, too.

Timing Is Everything

When did you buy your mutual fund? Please don’t say November or December. Yearend is the worst possible time to buy a mutual fund. That’s because, in most cases, mutual fund distributions are issued at the end of the year. Unless your mutual fund is an IRA or 401(k), you’ll pay taxes on those distributions. In other words, you’ll pay for a year’s worth of distributions made on a fund you’ve owned for a month or less.

If you buy a mutual fund for a taxable account, you may be paying more in taxes than you’d like. Each mutual fund prospectus has information about how much the average investor actually made after taxes. You’ll definitely want to do your homework before buying.

The ETF Option

Instead of buying a mutual fund, you may consider investing in ETFs. With ETFs, you have access to a professionally managed investment product without the excess taxes that accompany mutual funds.

The turnover ratio for ETFs also tends to be lower. For the top ten ETFs (as ranked by ETFdb), the turnover ratio is an average of 9.7%, according to Morningstar, compared with the average turnover rate of 74.4% for the top ten mutual funds. Where would you rather put your money?

DIY Tax Optimization

To avoid excess taxes at yearend, your best option is to forgo mutual funds and ETFs altogether in favor of a separately managed account. By purchasing individual securities, you can track and monitor investment performance and capital gains. Then you can decide which securities to buy and sell according to your own personal tax optimization strategy.

Managing your own investments for tax optimization may sound time consuming and complicated. For a long time, these types of personalized strategies were available only to the super rich who could afford a team of financial advisors to run the numbers. Not anymore. New technology and free online resources allow investors to easily track their investments regardless of their total net worth. You can now sign up for financial services online and easily build your own investment strategy.


Article from Forbes

Is Your Mutual Fund Too Risky?


WSJ.COMAPRIL 9, 2012, 6:13 P.M. ET
Article from Smart Money

The Sharpe ratio is a measure that helps investors figure out how much return they're getting in exchange for the level of risk they're taking on. It can help in comparing funds that invest similarly.

By JONNELLE MARTE

Investors have long measured their mutual funds against benchmarks like the Standard & Poor's 500-stock index, content with a fund that could keep up with or top the index.

But when the broader market itself is unimpressive -- or downright nightmarish -- some pros say investors may need to rethink their standards. Instead of just focusing on returns, investors need to be conscious of the risk and volatility they expose themselves to along the way, advisers say.

Enter the Sharpe ratio, a measure that helps investors figure out how much return they're getting in exchange for the level of risk they're taking on.

"A lot of folks just look at the return side of the equation," says Wasif Latif, vice president of equity investments for USAA Investments in San Antonio. "But how smooth was your ride to get to that return?" The Sharpe ratio puts those two pieces together.

Getting Paid for Risk
Created by Nobel laureate William Sharpe, a Stanford University finance professor, the ratio is intended to be a measure of what an investment returned for each "unit" of risk it carried. The top half of the ratio looks at what a fund returned over a set period and subtracts what an investor could have earned in a risk-free investment, typically defined as three-month Treasury bills, over that same period. The denominator is the fund's standard deviation, which measures how much a fund strays from its average performance -- in other words, its volatility.

The higher the ratio, the more an investor is compensated for the risk he takes on, says David Blanchett, a research consultant for Morningstar (MORN: 60.40, -0.75, -1.23%) Inc.'s Morningstar Investment Management unit.

Consider two hypothetical stock funds with similar returns. Fund A gained an average of 12% a year over the past three years, but had a standard deviation of 30%, giving it a Sharpe ratio of 0.4. Fund B returned an average of 10% over that same period but had a standard deviation of 20%, giving it a Sharpe ratio of 0.5. (With short-term Treasury yields near zero, the amount to be subtracted -- the return on a risk-free investment -- for now is basically zero.)

[SHARPEillo]While Fund A had a better return, Fund B delivered more return for the amount of risk it took, says Mr. Blanchett.

Some portfolio managers say they aim to have certain Sharpe ratios on their funds, using it as a checkpoint of sorts to make sure a fund's returns are in line with its risks.

Investors tend to have weaker stomachs during rocky markets, says Jeff Knight, head of global asset allocation for Putnam Investments, so having an easy way to compare investments on a risk-and-return basis can help them take emotion out of portfolio decisions.

"It's really about finding a good stable path," says Mr. Knight, who explains that he uses low-volatility stocks and options to help smooth out fund performance.

Useful Comparisons
For advisers and individual investors, Sharpe ratios, which Morningstar.com lists under a fund's "Ratings & Risk" tab, can be a particularly useful tool for comparing funds with similar strategies. For instance, two funds can end up with identical returns but have very different ways of getting there, Mr. Blanchett says. The Sharpe ratio can help investors determine which fund is causing them to take on more risk.

Sharpe ratios work best when figured over a period of at least three years, advisers say. Looking at the fund's risk-adjusted performance over several years offers insight on how the fund weathered different market environments, says Denny Baish, a mutual-fund analyst with Fort Pitt Capital Group, a wealth-management firm based in Pittsburgh. For instance, a fund with an attractive Sharpe ratio over the past 10 years would have managed to bring in returns to compensate investors for the risk it took through the recession of the early 2000s, the subsequent boom years, the recession that started in 2008 and the volatility of last year.

"You get more of a full market cycle," says Mr. Baish.

When used in conjunction with other measures, the Sharpe ratio can help investors develop a strategy that matches both their return needs and risk tolerance, advisers say. Mr. Baish, for instance, looks first at a fund's performance to get a sense for whether it might produce the sort of returns his clients need. Then he will look at the Sharpe ratio to see which funds are taking on outsize risk to get those returns. Some, like small-cap funds, will require taking on more risk than others, he notes.

No Predictor
To be sure, the measure has its limitations: It can be difficult to interpret and use for comparisons in periods when some funds' returns are below the Treasury-bill return or even negative. Investors should also keep in mind the Sharpe ratio is calculated using past performance, meaning it offers no guarantee on how a fund might behave in the future, says Mr. Blanchett.

But the ratio can be telling when comparing two funds that compete in the same category. For example, in Morningstar's large-blend peer group, the $2.3 billion Nuveen Tradewinds Value Opportunities has a three-year Sharpe ratio of 1.3 through March, while the $413 million Alpine Dynamic Dividend, came in at 0.66. The Nuveen fund bested the Alpine offering in both components of the Sharpe ratio: It delivered higher returns over the period -- an average of 22% a year versus 12% -- and was less volatile, as measured by standard deviation.

An Alpine Funds spokesman says the international exposure in the Dynamic Dividend fund caused it to underperform its peers in the past several years. Nuveen declined to comment.

— Ms. Marteis a reporter for SmartMoney.com. Email her at jonnelle.marte@dowjones.com.



Article from Smart Money

The Dividend-Fund Dilemma


THE INTELLIGENT INVESTOR

April 6, 2012, 7:28 p.m. ET
By JASON ZWEIG
Article from The Wall Street Journal

Sooner or later, the markets always punish investors who do the right thing for the wrong reason.

Some investors in dividend-oriented stock funds might end up learning that lesson the hard way.

So far this year, $9 billion has gone into mutual funds and exchange-traded funds that focus on U.S. stocks that pay stable, high or rising dividends, estimates EPFR Global, which tracks where investors are moving their money.

All other U.S. stock funds combined have had a net outflow of $7.3 billion.

Many of the investors joining the dividend stampede appear to be motivated by the low interest rates mandated by the Federal Reserve, which have led to a yield famine among traditional income investments like bonds, certificates of deposit and money-market funds.

Others might just be chasing past performance. The 100 highest-yielding stocks in the Standard & Poor's 500-stock index outperformed the overall market by an average of eight percentage points last year, according to Birinyi Associates.

Think twice before you jump on the bandwagon. While dividend-oriented funds are a perfectly legitimate way to invest in stocks, you shouldn't mistake them for bonds.

Nor, popular belief to the contrary, are they much safer than the stock market as a whole. And they could suddenly go from being tax-friendly to painfully taxable.

When you buy a Treasury, you collect interest and get your money back (not counting inflation) when the bond matures. When you buy a dividend-paying stock, you collect a quarterly payment—but that certainly doesn't mean the stock price will be stable.

In the fourth quarter of 2008, the S&P 500 fell 21.9%; dividend-oriented mutual funds lost 20.2%, according to investment researcher Morningstar MORN -0.79% . In other words, the average dividend fund fell nearly as much as the overall stock market. Bonds, meanwhile, performed beautifully: Over the same period, the Barclays Capital U.S. Treasury index returned 8.75%.

And from the stock market's peak in the fourth quarter of 2007 through its bottom in the first quarter of 2009, the Dow Jones U.S. Select Dividend index lost 53.8%, versus a 50.2% loss for the S&P 500, according to Fran Kinniry, an investment strategist at Vanguard Group.

In the long run, dividend-paying stocks are slightly less risky—and more rewarding—than the equity market as a whole. In the short run, however, they can expose you to the risk of being in the wrong place at the wrong time.

In 2007, 29% of the S&P 500's dividend income came from banks and other financial stocks, according to Howard Silverblatt, senior index analyst at Standard & Poor's.

That didn't end well. Many banks that had been paying steady income to shareholders suspended their dividends—or even went bust. Their investors suffered.

Today, financials account for only 13% of the S&P's dividends, with consumer staples (15%) and technology (14%) contributing the biggest share. Apple's AAPL +1.50% recent declaration of a dividend might prod more tech companies into distributing cash to shareholders. Some dividend funds could thus end up concentrated in technology stocks, much as they once were in financials, says Steve Condon, investment director at Truepoint, a financial-advisory firm in Cincinnati.

Another point: Since 2003, dividends have generally been taxed at just 15%, much lower than most bonds, whose interest payments are taxed at ordinary-income rates. Unless Congress and the White House take action, the dividend rate will leap to 43.4% next year for investors in the top federal tax bracket—the same rate that would apply to most bonds. You can avoid this problem in a tax-sheltered 401(k) or individual retirement account.

Robert Gordon, a tax expert at Twenty-First Securities in New York, thinks "there's a good possibility" that politicians can work out a deal to keep dividends taxed at today's lower rate, but there isn't any assurance of that.

The right reason to own one of these funds, says Daniel Peris, author of "The Strategic Dividend Investor" and co-manager of the Federated Strategic Value Dividend fund, is that stocks with growing cash distributions tend to be solid businesses that earn greater returns in the long run than stocks as a whole.

"I would like to think that every client who's buying a fund is buying for the right reason, but that would be naive," he says. "I acknowledge that some people, based on last year's strong returns, may be chasing past performance."

Any memory more than three years old is ancient history on Wall Street. But investors on Main Street should hark back to 2008. That year, many dividend funds provided at least 3% in income—but their average total return was minus-35%.

There aren't any easy ways to get income when the bond market is this stingy. Expecting the stock market to be generous certainly isn't one of them.

— intelligentinvestor@wsj.com; twitter.com/jasonzweigwsj
A version of this article appeared April 7, 2012, on page B1 in some U.S. editions of The Wall Street Journal, with the headline: The Dividend-Fund Dilemma.

Article from The Wall Street Journal