Good point. If you’re nearing retirement or have already retired, you should put a healthy slug of your investments in bond funds—typically about 40% of your assets.
In addition, you need to choose your stock funds with care. Standard & Poor’s 500-stock index plunged 55.3% during the 2007-09 bear market, the worst downturn since the Great Depression. I don’t expect the next one to be nearly as painful, but investors, especially those who are no longer collecting paychecks, need to keep a sharp eye on risk.
In choosing the funds for this article, I’ve limited myself to ones that I expect to perform well in bear markets compared with their peers. I’ve also insisted on low expense ratios, managers who invest heavily in their funds, and solid risk-adjusted returns (that is, taking volatility into account). All those factors have proved helpful in identifying funds that will produce future market-beating returns.
Below are my six best stock funds for 2017. I’ll write about exchange-traded stock and bond funds and bond mutual funds in the coming weeks. (All returns are through November 21 unless otherwise indicated.)
Talk about low risk. Although American Funds American Mutual F1 (symbol AMFFX) tends to lag in powerful bull markets, it has beaten the S&P 500 in all 14 stock market declines of 15% or more since its inception in 1950. Most recently, when the S&P tumbled 10.3% from December 30, 2015, through February 11, the fund lost just 6.7%. Over the past 10 years, the fund’s 6.6% annualized return almost exactly matches the return of the S&P—but with a much smoother ride.
The fund’s six managers hunt for undervalued large companies that pay steady dividends. But the managers focus on dividend growers, not riskier, high-yielding stocks. Just 5% of assets are in stocks that don’t pay dividends. With annual expenses of just 0.66%, this is a perfect middle-of-the-road fund for retirees. Note: To avoid paying a sales charge, buy American Mutual (as well as other American funds) through the Fidelity or Schwab online brokerages .
Vanguard Primecap (VPMCX) may be the nation’s best growth-stock mutual fund. A $10,000 investment in Primecap 31 years ago would be worth more than $450,000 today—more than double what you would have earned in an index fund that tracks the S&P 500.
Primecap Odyssey Stock (POSKX), one of two Primecap funds still open to new investors, is similar to the relatively conservative Vanguard fund, which is closed to new investors. Over the past 10 years, Odyssey Stock returned an annualized 8.0%—an average of 1.2 percentage points per year better than the S&P. Annual expenses are 0.65%.
The fund mixes well in a portfolio with American Mutual. While American Mutual emphasizes dividends and value, Odyssey Stock owns more fast-growing companies. More than half of the Primecap fund’s assets are invested in technology and health care.
American Funds New Perspective (NPFFX) is the perfect choice for investors who want to dip a toe into foreign stocks but don’t want a pure international fund. A global fund, New Perspectives at last report had roughly half of its assets in U.S. stocks and half in foreign stocks. But over the past three decades, its stake in U.S. stocks has varied from more than 50% to less than 25%, depending upon where the fund’s managers see the best opportunities. As is the case with all American funds, each of New Perspective’s seven managers is responsible for his or her own slice of the portfolio.
The fund’s record is exceptional. It has beaten the average global stock fund in nine of the past 10 years. Over that period, it has outperformed the MSCI All-Country World index by an average of 4.8 percentage points per year. Yet it has been slightly less volatile than the index. The fund has a strong tilt toward growth stocks—at last word, nearly one-fourth of the fund’s assets were in shares of technology companies.