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Part II: Establishing a Great Fund Portfolio
Another good reason to avoid sector funds is that they tend to carry much higher fees than other mutual funds do. Many sector funds also tend to have high rates of trading or turnover of their investment holdings. Investors holding these funds outside of retirement accounts may have to turn over a tidy portion of their returns to the IRS.
(10 percent or less) of your investment portfolio are funds that invest in real estate or precious metals. These types of funds can help diversify your portfolio because they can do better during times of higher inflation — which often depresses general bond and stock prices. Don’t feel obligated to invest in these sector funds, however, because diversified stock funds tend to hold some of these specialty investments.
Utility funds are popular with investors who want more conservative stock investments, and I discuss these funds in this section, too.
Real estate investment trust funds
Do you want to invest in real estate without the hassle of being a landlord? Invest in real estate investment trusts (REITs), which are stocks of companies that invest in real estate. These funds typically invest in properties such as apartment buildings, shopping centers, and other rental properties. Of course, it’s a hassle to evaluate REIT stocks, but you can always (you guessed it) invest in a mutual fund of REITs!
they are not appropriate for higher-tax-bracket investors investing money outside of retirement accounts. Most of the larger, diversified U.S. stock funds that I recommend earlier in this chapter have a small portion of their fund’s assets invested in REITs, so you’ll have some exposure to this sector with investing in a REIT focused fund.
Fidelity Real Estate, the oldest REIT fund, has been managed by Barry
year. Initial minimum investment is $2,500 ($500 for retirement accounts), a 800-544-8888.
.iViMs Cohen & Steers Realty Shares has been managed by Martin Cohen and
through most discount brokers, where the minimum initial investment is much lower (typically $2,000) instead of the normal $10,000. Discounters also offer it without transaction charges. Annual expenses are 1.1 percent, « 800-437-9912.
The only types of specialty funds that may make sense for a small portion
REITs are small-company stocks and usually pay decent dividends. As such,
Greenfield since its inception in 1986. Greenfield is an investing veteran who has been with Fidelity since 1968. This fund has expenses of 0.9 percent per
Robert Steers since the fund began in 1991. This fund is best purchased
Chapter 9: Funds for Longer-Term Needs: Stock Funds
Utility funds tend to attract older folks who want to earn good dividends and not have the risk of most stock investments. And that’s what utility funds are good for. But this once-staid industry is being shaken up by increased competition.
In a sense, these funds are superfluous. Most diversified stock funds contain some utilities, and those investors who want income can focus on better income-producing funds such as Wellesley Income in the hybrid group.
But if you want a pure play on this relatively stable industry, consider Fidelity Utilities, which has been around since 1987 and sports a good track record investing in utilities of all shapes and sizes, including some overseas stocks. Since 1992, this fund has been managed by John Muresianu, who has been with Fidelity since 1986. Its expense ratio is a 0.8 percent annually. Initial minimum investment is $2,500 initial minimum ($500 for retirement accounts).® 800-544-8888.
Gold & silt/er — precious metals funds
Over the millennia, gold and silver have served as mediums of exchange or currency because these metals have intrinsic value and cannot be debased. These precious metals are used not only in jewelry but also in less-frivolous applications such as manufacturing.
As investments, gold and silver do well during bouts of inflation. For example, during thel970’s, when inflation zoomed up in the U.S. and stocks and bonds went into the tank, gold and silver company stocks skyrocketed. People were concerned that our government was going on a money-printing binge.
Over a very long term, precious metals are lousy investments. They don’t pay any dividends, and their price increases just keep you up with, but not ahead of, increases in the cost of living. Although this is better than keeping cash in a piggy bank or stuffed in a mattress, it’s historically not been as good as bonds, stocks, and real estate.
If you want to invest in precious metals, don’t buy the bullion itself; storage costs and the concerns over whether you’re dealing with a reputable company make buying bullion a pain. Also avoid futures and options (see Chapter 1), which are gambles on short-term price movements.
Among the better funds are the Vanguard Gold & Precious Metals Fund,
which, like most gold funds, invests in mining companies’ stocks worldwide, because many are outside the U.S. in countries such as South Africa and Australia. This fund has one of the best track records among precious metals funds and has been around since 1984. Annual operating expenses for this tax-friendly fund are 0.5 percent. Minimum initial investment is $3,000 ($1,000 for retirement accounts).® 800-662-7447.