More Mutual Fund Styles & Investment Options

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mutual fund styles
In the Green Wealth Belt mini-course, I provided a list of the best mutual fund styles that should comprise the bulk of your investment portfolio. I also laid out three Investment Portfolio Models designed to meet the needs of any investor based on their risk tolerance level.  So we’ve got you covered whether you’re an Aggressive, Moderate, or Conservative investor. Please go and read that important mini-course if you haven’t done so already.

Red Wealth Belt (RWB)
Jumpstart Training Mini-Course

  1. Red Wealth Belt: Introduction
  2. What Is A Traditional IRA?
  3. More Mutual Fund Styles & Investment Options
  4. Starting a Business: The Big Idea Doesn’t Have to Be Big & Conclusion

 

Below are additional investment options that you can and should consider to further diversify your portfolio. They are a little more exotic, but can be very good if you come across the right offering. However, these investment options should not occupy a huge chunk of your portfolio.  My suggestion is to allocate no more than 5% of your portfolio to any single one of these investment types, and a maximum of 15% for any combination.

Mutual Funds

Value Mutual Funds – These types of funds consists of stocks that are associated with companies that are deemed to be undervalued or hidden gems. The stocks might also be paying dividends.  So basically you have fund managers scouring the stock markets looking for stocks that are priced too low. Sometimes the low price is justified and sometimes not.

The riskiness of Value Mutual Funds can vary significantly. But if you’re a Conservative investor, investigate “stable value funds” for the least risky version of these. Just remember that lower risk will often translate into a lower profit ceiling.

Sector Mutual Funds – The key word to keep in mind for these funds is the word “sector”. That’s because there are a great number of mutual funds that only invest in a specific sector or industry of the economy. Some of the most popular sector funds are associated with:

    • Precious metals
    • Telecommunications
    • Natural resources
    • Healthcare
    • Hi-Tech
    • Finance
    • Real estate
    • Utilities

The funds can be (and usually are) even more specific than the above list. For example, precious metal funds can be broken down into gold funds, silver, platinum, etc   Also, these funds may not limit their investments to just stocks. Investing in sector funds is a riskier play, but they can be good if you notice certain shifts in the economy.  Pay attention to the news and you’ll get a feel for which sector might be ready to take off.

Other Investment Options

Real Estate Investment Trusts (REITs) – These trusts are actually companies that own, invest in, and manage large real estate projects and commercial properties. This is a great way to diversify your portfolio with some real estate holdings. You can buy into REITs in a couple of ways. First, they trade on the stock exchanges just like stocks. So if you open a brokerage account, you can purchase shares. Second, you can acquire shares in a mutual fund that invests in a wide variety of REITs. But just like stock mutual funds, you’ll have to perform research and find one that matches your risk tolerance.

Electronically Traded Funds (ETFs) – If you’re a television watcher, you might have seen investment commercials that talk about SPDRs (spiders) and iShares.  These are ETFs. Think of them as being mutual fund shares that are traded on a stock exchange. They are like mutual funds because they are comprised of a big basket of securities (stock or bonds). But unlike the shares you own in a mutual fund, you can buy and sell your ETF shares and perform the same type of trading strategies just as you would for any common stock.

ETF’s have been around since 1989 and there are probably 1000 of them now.

There are three big benefits of Electronically Traded Funds. The first is that their fees are much lower than mutual funds. One  reason for this is because ETFs are tied to stock and bond market indexes such as the Standard & Poor’s (S&P) 500, Nasdaq Composite,  Russell 2000, etc.

For example, the well-known S&P 500 index is based on the daily activity of 500 leading publicly-traded companies. So as the index’s value rises and falls so do the ETF shares. With that being the case, there is no need for expensive fund managers and other administrative overhead.

The second benefit of most ETF’s is transparency. At any time, you can verify all of the securities in the portfolio associated with your EFT shares. You can’t do this with mutual funds because the managers are only required to reveal their portfolios to the public on a quarterly or semi-annual basis. So if they make investments that go against your goals and expectations, you won’t know it for a while.

The third benefit of ETFs relates to taxes. When mutual fund shares are sold based on your request or by fund managers to shift the direction of the mutual fund portfolio to improve overall earnings, these activities can generate lots of capital gains (profits). These capital gains must be paid out to you. In turn, you must pay federal income taxes on them.

Conversely, ETFs don’t have nearly as much internal trading activity as mutual funds and they buy/sell securities differently. As a result, the amount of capital gains they must pay out is significantly lower; hence, a lower tax burden for you.

To conclude, Electronically Traded Funds are generally linked to some type of stock or bond index and are comprised of those securities. This means they are well-diversified. And most indexes are much lower risk than individual stocks. So, ETFs could be a great investment choice for Moderate and Conservative investment portfolios.

Action Step:

  • Analyze your investment portfolio to determine if it needs more diversification. If so, consider the above options. Just don’t them a significant part of your portfolio.

>>>Starting a Business: The Big Idea Doesn’t Have to Be That Big & Conclusion>>>

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