Value investing enjoyed 15 minutes of sunshine in early 2025, when the S&P 500 sank 19% from its February peak to its early April trough. Dodge & Cox Stock (DODGX) — a member of the Kiplinger 25, our favorite no-load mutual funds — held up better, albeit with a 15% decline.

Since then, the large-company value fund has rebounded 21% through September. That's impressive, but it lags the S&P 500, which has bounced 34%. All told, over the past 12 months through September 30, Dodge & Cox Stock has climbed just over 9%, far short of the nearly 18% gain in the S&P 500.

It's a good time to remember that the point of holding funds with different investing approaches is to enhance diversification — it can smooth out your returns, for starters. These days, the S&P 500 is more growth- and momentum-tilted than ever, which makes Dodge & Cox Stock a good foil.

The fund's biggest holdings, Charles Schwab (SCHW), industrial firm Johnson Controls International (JCI) and aerospace and defense company RTX (RTX), bear no resemblance to the tech giants at the top of the S&P 500. Each of the three is up more than 40% over the past 12 months, by the way.

Hunting for bargains

The fund's six managers are true-blue contrarians. If a sector or industry is struggling, you can bet they're looking for hidden gems. Recently, they increased their investment in the health care sector, a market laggard since the start of 2023 and the worst-performing sector over the past 12 months.

Over the first half of 2025, they even added to stakes in embattled health giant UnitedHealth Group (UNH), which brought back a former chief executive to run the firm in May. "UNH is currently trading at a discount compared to the overall market, the health care sector and its historical valuation," the managers said in a report over the summer.

It can take time for their investment hypotheses to play out, so patience is required for investors in the fund. But over the past five years, Dodge & Cox Stock's 17% annualized return beats the S&P 500.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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After several attempts to make a sustained run above the $2,000-per-ounce mark over the years, it finally broke through in 2024, then sailed past the $3,000 mark earlier in 2025. More recently, it cleared the $4,000 price level.

That's roughly a doubler in less than two years' time, and nothing generates more new-investment buzz than an all-time heater.

Today, we'll point you toward some gold mutual funds we think are worth further consideration. Each has accumulated billions of dollars' worth of assets because of their ability to allow investors to participate in the commodity's rise.

But we're also going to explain why, in several circumstances, you might want to go in another direction for your gold exposure.

Why would you invest in gold?

Gold has long been considered a defensive investment, for numerous reasons. As I've written before, gold's allure in everyday scenarios can largely be tied to two characteristics:

Low correlation to stocks: The metal historically provides low to zero correlation with stocks, which makes it a potent source of portfolio diversification. That's why financial experts frequently say you should buy gold, but to limit it to about 5% to 10% of your assets.

Hedge against inflation: This is more a "perceived" characteristic. The theory goes that because gold is priced in U.S. dollars, inflation is actually a positive for gold. That's because as the dollar itself is worth less, gold becomes more expensive compared to dollars.

But as Kiplinger contributor Dan Burrows writes, reality often doesn't match the hype: "Even gold's reputation as an inflation hedge isn't all that great. Historically, at least, gold returns have only kept up with inflation over the long haul; the metal hasn't outperformed. Over the short and medium term, gold's record as an inflation hedge is generally pretty poor."

And in extreme-case scenarios, gold's tangible nature makes it an appealing holding during periods of chaos.

Indeed, in explaining gold's current parabolic run, BofA Global Research writes that "economic uncertainty and global instability have boosted the appeal of precious metals, leading to both investors and central banks increasing gold reserves."

None of that speaks to buying gold right this second — we'll defer to the experts on that front.

Why buy gold mutual funds?

The average person buying gold for investment purposes simply doesn't need the hassle inherent to purchasing physical gold.

You have to find a dealer, transport that gold, purchase appropriate safe storage, insure it (you don't have to, but it's a good idea), then find someone to take that gold off you when you want to sell.

By the way, you may also pay a markup when you buy physical gold and get a little less than its worth when you sell, so there's financial inefficiency to deal with, too.

Gold mutual funds, on the other hand, are as easy to buy and sell as … well, other mutual funds. Open up your brokerage account, click your mouse a few times, log off, have a sandwich.

But should you buy gold mutual funds?

Let's quickly look at a trio of names in the space. Two are among the largest such mutual funds, while the third is a smaller but established and well-respected product.

Fidelity Select Gold Portfolio

• Fund category: Equity precious metals
• Assets under management: $3.6 billion
• Yield: 1.6%
• Expense ratio: 0.68%, or $68 annually for every $10,000 invested
• Sales charge: N/A
• Minimum investment: N/A

The Fidelity Select Gold Portfolio (FSAGX) invests in more than 50 gold stocks – primarily gold exploration, mining and processing companies, but also a few royalty companies that own royalty streams to various projects.

Virtually all its holdings deal primarily in gold, but several also have operations involving silver, copper, platinum, diamonds and other commodities.

FSAGX is predominantly international in nature, with nearly 80% of its assets allocated in Canadian firms, including top-10 holdings Agnico Eagle Mines (AEM), Franco-Nevada (FNV) and Wheaton Precious Metals (WPM).

American firms make up less than 10% of assets, and most of that is concentrated in Colorado-based Newmont (NEM). None of this is abnormal — many gold mining funds are built similarly.

It's hard to beat Fidelity mutual funds on price, and that's certainly the case with FSAGX, on several fronts. Not only are its annual fees low, but it has no required investment minimum, and unlike many of its peers, it has no front-end sales charge.

Fidelity Select Gold currently garners a Bronze Medalist rating, Morningstar's forward-looking assessment system. But it's worth noting that its historical returns have been middling compared to the category, and it's under relatively new management, with Boris Shepov taking the reins in late 2024.

Learn more about FSAGX at the Fidelity provider site.

OCM Gold Fund Atlas Shares

• Fund category: Equity precious metals
• Assets under management: $173.3 million
• Yield: 1.0%
• Expense ratio: 1.88%
• Sales charge: N/A
• Minimum investment: $1,000

OCM Gold Fund Atlas Shares (OCMAX) is a much smaller gold mutual fund with a focus on mining companies that's similar to FSAGX. Its 50 holdings are largely gold producer stocks such as Agnico, Alamos Gold (AGI) and Lundin Gold (LUGDF).

However, it does have some exposure to pure-play exploration-and-development stocks, a few silver "primaries" (silver is their primary metal, but they also deal in gold) and a high-single-digit weighting to cash.

OCMAX might have a fraction of the Fidelity fund's assets, but it's an accomplished product. Its performance over the trailing 10- and 15-year periods is within the top 3% of its peers. And it earns a Silver Medalist rating for its strong management team and investment process. The minimum investment, at just $1,000, is extremely reasonable for a mutual fund, too.

Its major drawback is costs. "Despite its strengths, its fee remains a consideration, as it is priced within the most expensive quintile among peers," Morningstar says.

Learn more about OCMAX at the OCM provider site.

First Eagle Gold Fund A Shares

• Fund category: Equity precious metals
• Assets under management: $4.9 billion
• Yield: 2.7%
• Expense ratio: 1.16%
• Sales charge: 5% maximum, reduced on a tiered scale based on size of initial investment
• Minimum investment: $2,500

First Eagle Gold Fund A Shares (SGGDX) is the largest gold-specific mutual fund by assets, amassing almost $5 billion in AUM over its 30-plus years of trading.

The majority of SGGDX's portfolio looks just like the other two funds, with more than 75% of assets invested in a tight portfolio of 22 miners such as Wheaton, Agnico Eagle and Kinross Gold (KGC).

Where SGGDX stands apart is its modest 11% and 8% allocations to gold and silver bullion, respectively. (The remainder is in cash.) That means you're getting at least a little direct access to the price of gold … though that's also being somewhat muddied with the direct exposure to silver.

Performance has been mixed, with First Eagle's fund outperforming its category over certain periods but underperforming over others.

But looking forward, Morningstar awards SGGDX a Gold Medalist rating, lauding its low volatility exposure and high yield exposure, and also expressing optimism about leadership remaining intact amid a majority investment from Genstar Capital.

We typically don't highlight funds with sales charges. But as far as gold mutual funds are concerned, there aren't many options that don't feature sales charges for everyday retail investors.

Learn more about SGGDX at the First Eagle provider site.

Why you might want to consider gold ETFs instead

You likely noticed that all three gold mutual funds above are built around gold mining stocks.

That's not necessarily bad, per se – it's just one type of gold exposure. Specifically, you're not just investing in the price of gold itself, but also these companies' ability to make money off the price of gold.

Because there's an additional layer of speculation and uncertainty there, gold miners tend to trade in a more exaggerated fashion than gold – that is, if gold rises, gold miners often rise further, and vice versa.

To wit? As I write this, the price of gold is up nearly 60% year to date. FSAGX has delivered a total return (price plus dividends) of 122%.

But mutual funds largely limit you to this kind of exposure; it's rare for mutual funds to, say, actually hold bullion (let alone provide only that kind of exposure) or trade in gold futures. Moreover, gold mutual funds tend to be fairly expensive and often require retail investors to pay onerous sales charges that immediately impact performance.

If you have the option of investing in exchange-traded funds (ETFs), gold ETFs can be an ideal choice.

Not only do the market's best gold ETFs represent a much wider array of strategies, but they also never have sales charges, expenses are generally lower than gold mutual funds, and the investment "minimum" is just one share (or less if your brokerage offers fractional shares).

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Over the past three, five and 10 years, he has outpaced his peers (foreign large-company growth funds) and the fund's benchmark, the MSCI EAFE Growth Index.

But in recent years, FIGFX – a member of the Kiplinger 25, our favorite no-load mutual funds – has not kept pace with the broader MSCI EAFE Index, which includes growth and value stocks.

Over the past 12 months, the fund's 11.8% gain has lagged the EAFE index's 17.7% rise. The primary reason: Bank stocks make up 24% of the index, and they have performed well since interest rates around the world have climbed from near-zero levels.

The Fidelity International Growth owns some financial services stocks, but there's a "big gap" in exposure to the sector between the fund and the EAFE index, says Weiss.

Even so, the fund's bright spots include German software company SAP (which has returned 52% over the past 12 months), French aerospace and defense company Safran (up 55%), and U.K.-based aerospace firm BAE Systems (up 60%).

Meanwhile, Weiss says, he "gobbled up great franchises on the cheap" during the April stock selloff. On top of adding to stakes in existing positions, he initiated positions in Belgian bank KBC Groupe and German ticketing firm CTS Eventim, among others.

Weiss's contrarian tilt has resulted in an above-average stake in U.K. stocks in recent years. Investors have ignored that market since Brexit, he says, and "a lot of shares in great global franchises are trading at valuations that you haven't seen for years."

Some British stocks that are newish to the fund include the London Stock Exchange, RELX, which owns the LexisNexis legal database, and Howden Joinery Group, a supplier of kitchen and joinery products (doors, cabinets, furniture) to builders.

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Specifically, an SEC ruling could allow dozens of asset managers to offer existing mutual funds as ETF share classes.

That might sound like technical minutiae … a distinction without a difference. Investors already have thousands of ETFs and mutual funds from which to choose. What difference would it make if the ETFs themselves were simply a share class of a mutual fund?

Some of this comes down to taxes. There are very real differences in the ways that ETFs and mutual funds are taxed, so the SEC's decision — expected to come down within the next several months — will matter a lot for most folks investing in a regular taxable brokerage account.

It's also a potential win for fund managers, as it opens their existing strategies to a broader pool of investors.

Are there benefits for investors? Are there any drawbacks that investors should be aware of?

Let's take a look.

What is the SEC considering when it comes to mutual funds and ETFs?

It's normal for mutual funds to have multiple share classes that vary based on fees, sales loads or account minimums.

Back in the early 2000s, Vanguard patented a clever setup that let an exchange-traded fund be just another share class of an existing mutual fund.

This meant one mutual fund could offer both traditional mutual fund shares and ETF shares that were both backed by the same underlying portfolio, management and performance record.

That patent expired in 2023, leading to a flood of requests from other fund managers. To date, more than 60 have petitioned the SEC for regulatory relief that will allow them to issue ETFs as share classes of existing mutual funds.

The SEC doesn't have a reputation for moving quickly. As with most government regulators, there is a process, and that process is often slow and bureaucratic.

We're starting to see movement, though. In March, then-Acting SEC Chairman Mark Uyeda instructed staff to prioritize reviewing these petitions.

Given the Trump administration's preference for deregulation, the likelihood is that a decision will happen within the next few months that will open the floodgates for ETF share classes of existing mutual funds.

Why do mutual funds want ETF share classes?

There are plenty of reasons for fund companies to petition the SEC to allow for ETF share classes of mutual funds.

To start, this allows them to keep their track record of fund performance, which in some cases can stretch back decades, as the ETF would be considered part of the existing fund as opposed to a new one.

This would also be true of existing ETFs that wanted to offer mutual funds for 401(k) plans. As things stand now, an ETF with a great long-term performance wouldn't be able to mention the track record if an identical strategy was created in a mutual fund format.

It's also potentially cheaper and faster to create a new share class than to launch an entirely new product.

But mostly, it's about taxes.

Mutual funds and ETFs are taxed differently because of how investor flows are handled.

In a mutual fund, when investors redeem shares, the fund often has to sell securities to raise cash. Those sales can generate realized capital gains, which must be distributed to all shareholders — whether they sold shares or not — creating a potential tax bill for all fund holders.

I sell my shares, and you get stuck with the tax bill. It's not exactly an ideal situation.

By contrast, ETFs use the in-kind creation/redemption process. Large institutional investors can exchange baskets of the underlying stocks for ETF shares (and vice versa) without the fund selling holdings.

This allows ETFs to get rid of appreciated securities without triggering taxable gains inside the portfolio and soaking their investors.

Because Vanguard had ETFs as share classes of its existing mutual funds, its mutual funds were able to piggyback on the ETFs' tax advantages. The Vanguard 500 Index Fund (VFIAX), for instance, hasn't paid a capital gains distribution since 2003.

Why this matters to investors

It's always nice to have options at your disposal, and having an ETF version of your favorite mutual funds isn't a bad thing.

Existing investors in mutual funds might also get a tax break. As we saw in the case of the Vanguard S&P 500 index fund, the mutual fund was able to shift would-be capital gains into its ETF share class and avoid making capital gains distributions.

Other mutual funds could potentially be able to do the same, though it should be mentioned that having an ETF structure of an existing fund doesn't guarantee that capital gains distributions will be eliminated.

If a fund manager trades aggressively to the extent that the gains can't be offset by in-kind redemptions, there might still be taxable distributions to deal with.

It can also go the other way. Just as mutual fund investors might benefit from ETF tax efficiency, exchange-traded fund investors could end up dealing with mutual fund tax inefficiency if the assets are comingled.

This would be a particular risk in cases in which the ETF share class was a relatively small part of the overall fund and the fund generated substantial realized capital gains.

In a tax-advantaged account such as an IRA or 401(k), none of this is a major concern. A tax-paying investor should consider this, particularly for a new ETF share class of a large existing mutual fund that does a lot of active trading.

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A small recovery has helped lift returns – some. All told, over the past 12 months, the benchmark logged a slim, 1.2% gain. The T. Rowe Price Small-Cap Value Fund (PRSVX) – a member of the Kiplinger 25, our favorite no-load mutual funds – fared better with a 3.0% gain.

Fund manager David Wagner spent the market's worst days being a contrarian. He trimmed stakes in utility stocks and real estate investment trusts (REITs), which were performing well, and invested in "the most economically sensitive and tariff-exposed names," says Wagner, including retail and restaurant businesses, as well as materials and chemicals companies with exposure to global trade.

"People were overreacting to potential changes in tariffs. I'm not saying we don't view it as a problem, but none of this stuff is settled," he says.

Betting on better results

Wagner bought a stake in shoe company Steven Madden (SHOO) after the shares lost nearly half their value. It is the number-one importer of women's shoes in the country, he says, with a big chunk coming from China. Since hitting a low in mid-April, the stock has recovered 27%.

Wagner likes to focus on unloved fare, but lately he says he's drawn to companies with a "differentiated" approach.

Carvana (CVNA), for instance, "has upended the way people buy used cars," he says. He bought the stock as the firm teetered toward bankruptcy for $30 a share in late 2023; it recently traded for $327.

"It's a large cap now,” he says. "But we let it run. We invest with a long time horizon, and we don't sell arbitrarily when stocks surpass" small-cap measures.

Wagner has run Small-Cap Value since mid-2014. Over the past decade, his 7.7% annualized return beat 72% of his peers.

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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It also has a regional quirk: The majority of the fund's companies must be based in the upper Midwest, near the fund managers' St. Paul, Minnesota, home base.

In the past, the fund's regional focus meant the portfolio had a heavy tilt toward the industrial, financial and health care sectors.

But in recent years, managers Andy Adams and Peter Johnson have picked up shares in tech stocks – at the right price, of course – including Nvidia (NVDA), Microsoft (MSFT) and Amazon.com (AMZN), among others.

Those shares are among the fund's top holdings now, and they have been in retreat for much of the first four months of the year.

As a result, Mairs & Power Growth lost 7.5% for the year to date through April, lagging the 5.1% decline in the S&P 500 Index. Over the past 12 months, the fund's 5.0% gain lagged the S&P 500 by a wide margin as well.

Even so, many of the fund's financial stocks advanced, including JPMorgan Chase (JPM), Fiserv (FI) and Visa (V). All have posted double-digit gains over the past 12 months, which helped the fund's return.

Gains in Swiss pharmaceutical firm Roche Holdings (RHHBY) and utility company WEC Energy Group (WEC) provided a lift, too.

We're watching the fund – which is a member of the Kiplinger 25, our favorite no-load mutual funds – closely. Tech stocks make up 34% of the portfolio, above average for its peer group and up from a small exposure a decade ago.

During the selloff, the managers added another tech stock, Taiwan Semiconductor Manufacturing (TSM), to the portfolio (albeit at discounted prices).

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The S&P 500 has declined 14% for the year to date through April 7; health care stocks have lost just 2%.

Our favorite health fund, the Fidelity Select Health Care Portfolio (FSPHX) – a member of the Kiplinger 25, the best no-load mutual funds – lags the sector index for the year to date. But over the past 12 months, the fund outpaced 65% of its peers despite a 6.9% loss.

Stakes in medical device companies advanced, including shares in Boston Scientific (BSX), as did certain biotech holdings, such as Alnylam Pharmaceuticals (ALNY).

What haven't done well are managed care companies, such as UnitedHealth Group (UNH). Uncertainty about government policy, particularly about Medicare, was a drag.

The other problem: Costs accelerated in 2024 for these firms thanks to inflation, says manager Ed Yoon, and government reimbursements for Medicare Advantage didn't keep pace.

Yoon favors companies with increasing demand for their products or services and improving free cash flow (money left over after operating expenses and spending to maintain or expand the business).

The recent good turn is a rebound after the sector's bad post-election results last year, says Yoon. In the last quarter of 2024, health care stocks sank 10% as the S&P 500 rose 2.4%.

"But the market feels like it's beginning to broaden out, and if that continues, it should bode well for the sector," he adds – before admitting he has said that before.

Still, things have changed in the health sector. While investors weren't looking, "innovation has progressed, and companies that weren't making money are now profitable. That can be a powerful driver for stock prices," Yoon says, adding that much of the sector's change has "gone unnoticed."

Since taking over as manager in 2008, Yoon has posted a 12.5% annualized return, which has outpaced the typical health fund and the S&P 500.

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Including common stocks in retirement portfolios can mitigate the adverse effects of inflation. On the other hand, a mutual fund enables many investors to combine their money with a professional investment manager, buying and owning shares in the fund rather than individual company shares owned by the fund.

A balanced portfolio holding stocks and mutual funds can offer reassurance and confidence in your investment strategy. Here’s what you need to know:

1. Your level of control

Individual stocks: You select which company shares to buy and sell.

Mutual funds: The investment manager has total discretion.

2. Research and performance

Stocks: You make buy-and-sell decisions based on your own research, knowledge and expertise.

Funds: The fund manager manages the portfolio, researches and monitors performance.

3. Fees and expenses

Stocks: You pay commissions and fees for purchases and sales, though commission-free trades are common. Many brokers charge annual account maintenance fees.

Funds: Most funds have ongoing costs — referred to as “expense ratios” — that cover operating, management, administrative expenses and marketing. Other fees may also be charged.

4. Valuation, marketability and transparency

Stocks: Common shares are priced when the market is open and can be bought or sold during that time. You always know the portfolio composition.

Funds: Mutual fund shares are priced at the end of the day and trade at that closing price. A complete portfolio listing of all stocks is published periodically.

5. Dividends and capital gains

Stocks: You know the amount and timing of dividends received. You also determine the timing of sales that generate capital gains and losses.

Funds: Dividends and capital gains are accumulated in the fund and distributed periodically. Mutual funds can distribute only net capital gains, not losses.

6. Diversification and risk

Stocks: It’s riskier to hold one or two stocks, but you can control the degree of diversification and concentration in any single company, industry or geographic region.

Mutual Funds: With a large basket of stocks, risk is spread around — although most funds have stated investment objectives that are usually limited to a single characteristic, such as U.S. large-cap stocks. Over time, however, the positions in the fund may drift from the initial objective.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

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What’s a trusted contact? It’s a person 18 or older who can tell your financial institution where you are — and how you are — if you can’t be reached or there’s something suspect about your financial requests or instructions.

Suppose, for example, your financial institution notices unusually large withdrawals from your retirement account, or that someone in Brussels has charged the down payment on a BMW to your debit card. Normally, your bank or brokerage will simply call you and ask what on earth you’re doing (in so many words).

But what if your financial rep can’t reach you because you’re out of town, or you’re sick, or you’re simply letting your mail pile up? In that case, your trusted contact can tell the bank where you might be, or if there could be some other reason you’ve been out of touch, such as travel or a natural disaster.

Or what if your actions are suddenly out of character? For financial advisers, there’s a clear reason why clients should have a trusted contact.

“Suppose you had a conservative client — he’s paid off his house, doesn’t use credit cards — and one day he calls and says, ‘I need $100,000 and I need it now,’” says Mary Ballin, partner and wealth adviser for Perigon Wealth Management in Walnut Creek, California. “It’s a sensitive situation,” she says. “You want to make sure he’s okay.”

Vanguard, the Valley Forge, Pennsylvania, mutual fund giant, has a team dedicated to calling attention to accounts whose owners may be having cognitive difficulties or are potentially being taken advantage of, says John Ginelli, head of investor protection at Vanguard.

The company uses a mix of surveillance methods, ranging from computer algorithms to referrals from telephone representatives, to flag unusual activity. Only members of the team may reach out to a trusted contact, he says.

Even though you’re not legally required to appoint a trusted contact, you probably should. Here’s what a trusted contact might do:

Confirm contact information

Contacts need to be able to verify the client’s home and cell phone numbers, and possibly the client’s e-mail address. If the client has changed his or her residence or phone number, a trusted contact should know that, too.

Know who can speak for the client

Contacts should be able to inform the financial institution of any legal guardian, executor, trustee or holder of a power of attorney on the client’s account. These individuals can also be helpful in tracking someone down.

Speak to whether there is a health or other crisis

Is the customer in the hospital perhaps, or showing signs of dementia? For example, if a customer inquires repeatedly about a transaction and seems confused, the company may call a trusted contact to see whether they have noticed any difference in behavior.

Trusted contacts should also be able to say whether they think someone is being manipulated or abused.

If you’re the trusted contact, you might have to consider proactively getting in touch with the financial institution and the client to discuss a concern.

For example, victims of fraud may refuse to believe that they’re being conned, says Ginelli. “A trusted contact might help that client to see the light.”

What trusted contacts can’t do is access a client’s accounts or make transactions. And if you’re asked to be a trusted contact, don’t worry about sharing your information with the financial institution — it may not use information about a trusted contact for marketing purposes, so agreeing to be one won’t result in sales pitches for investment products.

Choose your trusted contact carefully

Typically, your trusted contact won’t be your financial planner or broker. Barry Glassman, a certified financial planner with Glassman Wealth Services, agrees.

“I’ve never been asked to be a trusted contact, nor would I accept that role. It seems like a conflict. It should be someone who interacts with the client beyond a financial planning relationship.”

Clearly, your trusted contact needs to be relatively easy to reach. For married couples, the obvious candidate is a spouse, Ballin says.

Older couples might also consider an adult child, or the executor of their will, Ginelli says. You may establish more than one trusted contact.

And don’t forget to ask your contact first.

“Before adding their information to your accounts, it’s a good idea to discuss this with your chosen trusted contact so they’re aware of the responsibility should your financial institution need to reach out,” says Leanna Devinney, vice president, branch leader at Fidelity Investments.

If you have already named a trusted contact, review that designation periodically. People drift apart — or die. In either case, they won’t make a good trusted contact.

The trusted contact form is optional, even though the Securities and Exchange Commission and the Financial Industry Regulatory Authority endorsed the policy in 2018. If you’ve never seen one, you’re not alone. “I haven’t received one yet,” says Patrick Chu, editor at the Wall Street Journal.

What percentage of investors have a trusted contact? “Like every firm out there, I can say that we don’t have enough,” Vanguard’s Ginelli says. “The more the better. The law requires us to solicit people to have trusted contacts and have a method for doing so, but it doesn’t require clients to have one.”

If you’re interested in naming a trusted contact, call someone at your broker, financial adviser, or mutual fund company. They should be able to provide you with the proper forms. You may also be able to find a trusted contact form on your financial representative’s website.

Ginelli says that some clients have reached out to Vanguard after getting a diagnosis of cognitive disability, for example. The trusted contact form is probably the easiest financial form you’ll ever fill out, he says. “We just need a name, a phone number, a street address, or an e-mail address.”

Other ways to protect your financial account

If you’re worried about becoming the victim of fraud or making unwise actions on your own because of cognitive disability, be sure to designate someone with power of attorney in case you’re disabled or otherwise unable to take care of your own affairs, even temporarily.

Setting up joint financial accounts with a spouse or an adult child can ensure that someone is watching your money — although a joint account will let the co-owner make withdrawals, too. Authorizing someone (often called an agent) can give them permission to make transactions in your account, but the authorization can also be drawn up to allow only account monitoring or inquiries.

Finally, make sure you’re doing what you can on your own to protect your accounts. Use strong passwords, multifactor identification and secure Wi-Fi.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The fund isn't an index-hugger, it's clear, but therein lies its value. Because Odyssey Growth has an "unconventional collection of stocks" that hardly resemble the index, as the managers said in its recent annual report, the fund can help boost the overall diversification of your portfolio.

It has little exposure to the stocks of the huge companies known as the Magnificent Seven, for a start. The fund doesn't hold Apple (AAPL). And the remaining six, including Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA), made up just 9% of the fund's assets at last report. For comparison, those six stocks make up a combined 24% share of the S&P 500.

Another drag came from Odyssey Growth's longstanding tilt toward healthcare stocks. Nearly 30% of the fund's assets are invested in that sector – almost triple that of the S&P 500. But health stocks have trailed the broad-market index over each of the past six years.

Both factors contributed to the fund's performance over the past 12 months. Odyssey Growth, up 19.9% – a spectacular return on an absolute basis – fell short of the 26.4% return in the S&P 500.

The five Odyssey Growth managers divide the fund's assets and run a portion of the portfolio independently. But they all focus on growing companies priced at a discount that have a catalyst – a new product, say, or a restructuring – to drive prices higher. That process leads to a portfolio that's different from the S&P 500 in other ways, too, such as valuation:

The fund's stocks trade at an average price-to-earnings (P/E) ratio of 19 (based on year-ahead estimates), which is far lower than the S&P 500's P/E of 24. Top holdings include Eli Lilly (LLY), Alphabet (GOOGL) and Raymond James Financial (RJF).

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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T. Rowe Price Floating Rate (PRFRX), our favorite bank loan fund and a Kiplinger 25 member since 2022, yields 7.2%. "The coupon rate on bank loans has never been higher," says fund manager Paul Massaro. "That leaves a cushion for bank loans to endure even more Fed cuts and still deliver high income."

Over the past 12 months, Price Floating Rate has gained 8.7%, outpacing 67% of its peers. By contrast, the Bloomberg U.S. Aggregate Bond index returned 1.3%.

In truth, bank loans can do well whether interest rates are rising or falling, within parameters. When rates are rising (and bond prices, which move in the opposite direction, are falling), these securities typically hold up better than the broad bond market because their interest payments adjust upward, too. In 2022, the Fed raised rates four times, and the typical bank loan fund lost 2.5% – but the Bloomberg U.S. Aggregate Bond Index fell 13% (Price Floating Rate lost 0.7%).

When interest rates fall, bank loans don’t necessarily sour, as long as the cuts aren’t draconian and the result of a struggling economy. Despite the Federal Reserve's one-percentage-point cut in short-term rates in 2024, for example, bank loans still beat "almost everything in fixed income," says Massaro. As long as the pace of rate cuts remains modest in 2025, he adds, Price Floating Rate should perform relatively well.

Massaro and his team of analysts dive deep to find quality loans trading at a discount. Over the past decade, the fund's annualized return of 4.7% beat 85% of its peers.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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"The U.S. is in the early innings of reindustrialization, a multi-decade investment opportunity that will restore growth to the U.S. industrial economy following 20-plus years of stagnation," Morgan Stanley research analyst Chris Snyder wrote in a recent report.

The big infrastructure buildout is worth paying attention to because it encompasses a broad range of businesses in a number of sectors. Many infrastructure companies are old line industrials, including businesses that make heavy machinery or parts for industrial production. Other companies provide services to such businesses or transport goods or people. Also included under the infrastructure tent are companies in the materials, energy and utilities sectors. Even some tech firms are considered infrastructure plays these days.

It's the dawn of a new era for infrastructure spending

America's manufacturing industry is beginning to reassert itself. The dominance of U.S. industrial firms began to decline when China joined the World Trade Organization in 2001. Back then, American industrial companies made up roughly 12% of the market value of the S&P 500.

But cheap labor abroad and a focus on globalization helped to undermine the sector, as companies moved manufacturing overseas. (At the same time, the soaring fortunes of technology-related firms shifted market leadership in their direction.) Today, industrial stocks represent just over 8.5% of the S&P 500.

But the tide is turning. The COVID-19 pandemic highlighted the downsides of operating some businesses on an international scale. Think back to the floating traffic jam of 50 container ships in the Pacific Ocean waiting to dock in California in 2021. Such supply-chain snafus increasingly spurred domestic companies to bring production back to the U.S., and some foreign firms are building manufacturing plants in the U.S. to be closer to their American customers.

As the shift got under way, it became abundantly clear that the country's aging infrastructure, after decades of underinvestment, badly needed an upgrade, from the power grid to railways, bridges, highways and airports. Politicians on both sides of the political aisle agreed. Between 2021 and the end of 2022, lawmakers decided to allocate nearly $2 trillion in federal funding and other incentives to restore manufacturing in America and upgrade the country's infrastructure through a combination of three acts: the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the CHIPS and Science Act.

"This massive investment could drive long-term growth for the industrials sector for years to come," says Fidelity's David Wagner, who runs the firm's Select Industrials Portfolio.

More than 60,000 projects have been announced as part of the $1.2 trillion Infrastructure Investment and Jobs Act, including 10,000 bridge projects, 175,000 miles of roadway repairs and 1,100 airport modernization projects, among other things.

Nearly $60 million, for instance, will pay for a seventh runway, as well as other upgrades, at Denver International Airport. And $30 billion of the $280 billion CHIPS and Science Act has been earmarked to help fund 23 projects, including 16 new semiconductor manufacturing facilities in 15 states so far. Two years ago, the U.S. produced none of the world's most advanced chips, according to the government. By 2032, the country will produce nearly 30% of the global supply of leading-edge chips.

Indeed, an unprecedented amount of spending is being "funneled into a relatively small area of the U.S. economy," says Yung-Yu Ma, chief investment officer of BMO Wealth Management, who has been recommending that investors allocate a bigger percentage of their portfolio to U.S. infrastructure since early 2023. "These trends are strong and durable," he says.

There's room for infrastructure stocks to run

Judging by the soaring returns in some bellwether stocks, the industrial renaissance is well underway. Industrial giants such as Caterpillar (CAT), GE Aerospace (GE) and RTX (RTX) have each posted gains of more than 50% over the past 12 months – ahead of the 34% climb in the S&P 500.

There's even an artificial intelligence (AI) angle to some infrastructure stocks that is fueling share-price increases. Mounting demand for data centers to handle AI tasks, for instance, has pushed shares in Digital Realty Trust (DLR), a real estate investment trust (REIT) that specializes in data centers, up 45% over the past 12 months. The stock now trades at a five-year-high price-to-earnings (P/E) ratio based on estimated earnings for the year ahead.

But it's not too late for investors to cash in on the infrastructure rally. For starters, only a relatively small portion – roughly 20% – of the total money set aside in the spending bills has been spent so far. And these projects take time to get up and running. "We're in the middle of the third inning of the infrastructure trend. There's still a good way to go," Ma says.

The best infrastructure stocks to buy

Given the breadth of spending that the infrastructure bills cover, there are many ways for investors to cash in on the industrial renaissance. "You're seeing this wide array of project announcements – in the energy sector, in commercial infrastructure, public infrastructure, utilities," says Fidelity's Wagner. "It's multifaceted, which is different than other up cycles in industrials. It's not a play on one end market or one subindustry cycle."

We've highlighted seven companies, in a variety of industries, that we expect to benefit from infrastructure spending. Be patient with these investments. Some may win over the near term, but most may take time to pay off.

"We're not building these factories in days or months. They're going to take quarters and years," says Jason Adams, who runs T. Rowe Price Global Industrials fund. "There's still a lot of buildout to go." Returns and data for the investments below are through November 30, unless otherwise noted.

Aecom

Big construction projects need to be managed efficiently, and that's what Aecom (ACM) does. The infrastructure professional-services firm plays the role of maestro over the life of a building project. It also offers advisory, planning, design and engineering services – and more.

"Aecom is a high-quality, low-risk way to play secular growth in global infrastructure," says Truist Securities analyst Jamie Cook, who recommends the large-cap stock.

New contracts at home and abroad are flowing in. Roughly three-fourths of the company's business is stateside. In October, Aecom won a Texas Department of Transportation contract to provide design services for a segment of Highway I-45 in Houston. And in September, it agreed to manage the construction of a new terminal at San Diego International Airport, among other improvement projects there.

Another fourth of Aecom's business is overseas, and last fall it won separate contracts for services in water-supply programs in South Africa and the U.K., as well as a rapid-transport project in Bangkok to design tunnels and tunnel ventilation systems, among other things.

"We expect growing demand for environmental, road and water projects to provide the company's design and consulting service with a stable source of revenue," says Argus Research analyst John Staszak, who rates the stock a Buy.

The recent contract wins have helped boost shares 28% since the start of 2024. Yet the stock is still relatively inexpensive. It trades at 23 times expected 2025 earnings – a discount to other engineering and research-and-development services firms, which trade at a median P/E of 26, according to Zacks Investment Research.

Eaton

Electricity demand is expected to soar thanks to the use of artificial intelligence, reshoring efforts, and the growing adoption of electric vehicles and renewable energy.

"We expect electricity demand to double between now and 2050," says Bernstein Research analyst Chad Dillard. To put that in perspective, over the next five years, electricity demand could increase at an average annual pace of 1.7%, which is far faster than the 0.4% annual growth rate in demand over the past decade.

To keep up, utilities must upgrade their electrical infrastructure. Spending on electrical equipment could rise by as much as 3% to 7% per year, on average. As a result, electrical-equipment manufacturers such as Eaton (ETN) are poised to deliver double-digit earnings growth, says Dillard.

Eaton makes electrical systems and components for end users in multiple sectors and industries, including utilities, manufacturing, commercial and residential property, automakers, aviation, and technology. The company's broad array of customers makes Eaton a beneficiary of several megatrends, including the upgrade of America's power grid as well as the buildout of data centers. An aging airplane fleet amid a rise in air-travel demand is boosting orders for Eaton's aerospace equipment.

Shares have climbed 67% over the past 12 months, so don't expect a similar pop in 2025. But there's still upside left, says UBS Securities analyst Amit Mehrotra, whose 12-month price target for the stock, $431, represents a 15% gain from the current share price.

"We think the company can sustain high-single-digit revenue growth for several years to come," says Mehrotra – a respectable pace for a company with a $148 billion market value. The company's plan to buy back nearly $14 billion in shares over the next four years also bodes well for the stock.

And despite the runup, Eaton's stock isn't expensive relative to peers. Its P/E of just 31 is a tad below the machinery and electrical equipment industry and is justified by estimates of 12% earnings growth over each of the next three years – a smidge ahead of its peers. Still, we'd be on the lookout for lower entry points to pounce on the stock.

GE Vernova

GE Vernova (GEV) – an energy equipment and services company – was formed last year from the merger and then spinoff of General Electric's various energy businesses, including renewable energy, power, digital and energy financial services. The stock has been trading only since April 2024. (General Electric shareholders received one share of GE Vernova for every four shares of GE.) But given its provenance, GE Vernova is a powerhouse. Its natural gas and wind turbines generate roughly 30% of the planet's electricity, according to the company.

That puts the firm in position to gain from the world's rising demand for power. But GE Vernova is also a player in the transition to a larger and more sustainable electric power system. About $73 billion of the Infrastructure Investment and Jobs Act is pegged to grants that will encourage investment in energy efficiency, greenhouse-gas emission reduction and clean-energy technologies – and that's the stomping ground of GE Vernova's electrification business segment, which among other things is working to leverage AI to build a digital power grid.

It is possible that under President Trump, renewable energy may get less attention and money, which would be bad news for GE Vernova's electrification business. But William Blair Research analyst Jed Dorsheimer says Trump's nominee for Secretary of Energy, Chris Wright, is likely good news for GE Vernova's power-generation business, which is dominated by natural gas power and represents 40% of overall revenue. The reason: Wright is chief executive of Liberty Energy (LBRT), a fracking company. (Vernova's power business also includes hydroelectric, nuclear and steam power.)

GE Vernova's sky-high P/E of 50 is a negative, for sure. But "the Street is underestimating the company's growth potential," says Jefferies Financial Group analyst Julien Dumoulin-Smith. After a 7% climb in revenues in 2024, he expects sales growth to tick up 12% in 2025 and 9% in 2026.

All of the firm's three business segments – power, wind and electrification – seem poised to do well in 2025, he adds; its wind business has been a drag of late but is improving. For the company overall, Dumoulin-Smith estimates 40% average annual growth in earnings before income tax and interest over the next three years, due in part to pruning of the unprofitable wind business and big gains in its larger businesses, power and electrification. We'd still be choosy about entry points with this utility stock; it's best to buy on dips.

Rockwell Automation

A significant portion of the equipment in factories dates to the 1970s and 1980s and needs an upgrade, says Morningstar stock analyst Nicholas Lieb. That works in Rockwell Automation's (ROK) favor because the company makes equipment and software products that help factories automate their processes and operate more efficiently.

ROK's analytic software helped Kraft Heinz (KHZ) improve the operational efficiency of its Ore-Ida potato products facility in Oregon. From peeling potatoes to packaging the products, the system increased Ore-Ida's production capacity by 10%.

Rockwell also helps its customers maintain and update their systems. A dedicated phone line at a mill for International Paper (IP) is connected to Rockwell engineers to help monitor and troubleshoot operations. "Without this help from Rockwell, International Paper would be forced to hire another engineer," says Lieb, which could cost the company more.

But a slump in global manufacturing has weighed on Rockwell shares over the past 12 months. Elevated interest rates (and thus higher borrowing costs) made many of the company's customers cautious about spending on new equipment. At the same time, a surfeit of goods (a post-pandemic outcome following supply-chain challenges) prompted many manufacturers to pause production and wait for demand to catch up with supply. In its most recent fiscal year, which ended in September, Rockwell's revenues dipped by 9% and earnings by 20%. That drag could extend into 2025.

Rockwell hasn't been sitting on its hands. In the summer of 2024, the company announced plans to lay off 3% of its global workforce. It has been buying back stock, too. In 2024, it repurchased 2.2 million shares at an average price of $270. Even so, investors have been unenthusiastic, and the stock has gained just 9% over the past 12 months.

Though Rockwell shares are not expensive, they're not a screaming bargain either. The stock trades at 31 times earnings, which is on par with the stock's median P/E over the past decade. But for patient investors, Rockwell could pay off. Although a consensus of analysts expects earnings growth to contract by 2.5% in 2025 compared with 2024 levels, things will look up in 2026, when analysts project a 19% jump in profits.

United Rentals

Reshoring requires equipment to build things. But construction companies have been opting more and more to rent equipment rather than to buy and maintain it on their own, says Jason Adams, manager of T. Rowe Price Global Industrials fund. That puts United Rentals (URI), a rental company with a large and diverse fleet of construction equipment, in good shape to benefit from large infrastructure projects.

United is already busy. It has been supplying equipment for several large-scale construction projects, including a 131-acre entertainment and shopping complex in Miami that will feature a new stadium for the city's major-league soccer team. Smaller projects have been on pause, but as interest rates continue to fall, lower borrowing costs should spur more activity on that front, says Value Line analyst Nils Van Liew. And acquisitions of smaller companies that complement United's business could boost growth.

The catch: Shares are up 83% over the past 12 months. They currently trade at 18 times earnings – level with the rest of the building- and construction-products market, but ahead of the stock's 10-year historical P/E of 12. Shares could tread water while United digests recent gains.

Vulcan Materials

Vulcan Materials (VMC) is the leading rock quarry company in the U.S. That means as more liquid natural gas facilities, warehouses, battery plants and factories are constructed here, "Vulcan is going to sell a lot of rock to build the foundations," says Bruce Kennedy, a portfolio manager of DF Dent Midcap Growth. "Rock has been used to build roads since the days of Babylon," he adds. "And there are no other substitutes."

Vulcan makes money by selling crushed rock – and it pulls in even more to ship it. Many of Vulcan's quarries and distribution yards are near fast-growing metro areas of the U.S. (cities in Texas, North and South Carolina, and Florida, for example). New permits for quarries are hard to come by, which diminishes threats from competitors, giving the company both "pricing power and low obsolescence risk," says Kennedy. And Vulcan boasts a materials reserve of 69 years, at current levels of production.

According to Zacks, analysts expect average annual earnings growth of 14.5% over the next three years, better than the 9.6% pace the company recorded over the past five years. Kennedy expects earnings to jump 22.5% in 2025 compared with 2024. The stock trades at an above-market 32 times earnings, but that's in line with its 10-year historical P/E.

Xylem

The Infrastructure Investment and Jobs Act will provide $50 billion to improve our nation's drinking water, wastewater and stormwater infrastructure. It's the single largest investment in water the government has ever made, according to the Environmental Protection Agency. Xylem (XYL), a global water technology company, is primed to benefit because it makes equipment for water transport, treatment, testing and use.

Supply-chain bottlenecks have been a hurdle for Xylem of late, but its high-tech products, such as its smart water meters, have been in big demand, says CFRA Research analyst Jonathan Sakraida, who rates the stock a Strong Buy. When all the numbers are in, he expects them to show revenues jumped 16% in 2024 compared with 2023. That's ahead of the firm's five-year historical revenue growth rate of 12%.

"Xylem is benefiting from the digital transformation of the water business, with accelerating industry adoption of digital solutions," Sakraida says. Another boost will come from updated regulations on forever chemicals and other contaminants in drinking water.

We appreciate Xylem's environmental stewardship, and the stock has earned a place in the Kiplinger ESG 20, the list of our favorite stocks and funds with an environmental, social or corporate governance focus. But this pure-play water in-frastructure company deserves mention in a list of infrastructure beneficiaries, too.

Even so, the stock has been a bit "underappreciated" in recent months, says Sakraida, as investors realized that the allocation of Infrastructure Investment and Jobs Act funds would be more of a "slow burn" than "explosive" to the water company's sales and earnings growth.

Shares have climbed just 12% since the start of 2024. But that means they're a relative bargain. Xylem stock trades at 27 times expected earnings – well below the stock's five-year median P/E of 34, according to Zacks. Analysts expect annualized earnings growth of 13% over the next three years, or a tad better than the 12% growth rate logged over the past five years.

The best infrastructure funds to buy

Investing in individual stocks can be rewarding, but some investors may prefer to diffuse the risk by investing in several companies via a focused infrastructure fund. Here are our favorites.

Global X U.S. Infrastructure Development (PAVE) is an exchange-traded fund that offers broad exposure to companies involved in "the nuts-and-bolts buildout of bridges and roads, as well as to companies that play a role in electric-grid enhancements and even companies that rent out equipment," says chief investment officer of BMO Wealth Management Yung-Yu Ma.

The index fund boasts a robust, 22.1% annualized return over the past five years – the top return of all infrastructure funds. Trane Technologies (TT), Parker Hannifin (PH) and Eaton are the fund's top holdings. It charges a 0.47% expense ratio.

Invesco Building & Construction ETF (PKB) holds only building and construction companies, as its name implies, and fund-tracker Morningstar classifies it as an industrials sector fund. Compared with Global X U.S. Infrastructure Development, its portfolio is more concentrated (30 stocks), and it charges a higher expense ratio (0.57%). But its five-year annualized return of 21.1% beat 93% of its industrial-fund peers.

One-third of the portfolio is devoted to homebuilder stocks, including Lennar (LEN), NVR (NVR) and PulteGroup (PHM), which Global X U.S. Infrastructure Development doesn't own. Even so, the two ETFs share some of the same top holdings, including Trane Technologies, Martin Marietta Materials (MLM) and Argan (AGX).

We have our eye on Fidelity Infrastructure (FNSTX), though the fund is relatively new; it launched in November 2019. The 48-stock portfolio includes a slug of industrials (Waste Connections (WCN), Norfolk Southern (NSC)), utilities (NextEra Energy (NEE), Southern (SO)), real estate firms (American Tower (AMT)) and energy stocks (Williams Companies (WMB), Targa Resources (TRGP)).

But the fund's global focus – 23% of assets are invested in foreign stocks – has been a drag. Over the past five years, Fidelity Infrastructure has delivered a 9.1% annualized return. That was not as remunerative as some of the other funds mentioned here, but it beat the typical infrastructure fund. The fund's expense ratio is 0.95%.

Other industrials sector funds to consider include THE Fidelity MSCI Industrials ETF (FIDU); the Industrial Select Sector SPDR ETF (XLI); and the Vanguard Industrials ETF (VIS). All boast low fees and five-year annualized returns of better than 13%.

Finally, though Fidelity Select Industrials (FCYIX) manager David Wagner is relatively new, the fund has returned a cumulative 49.6% since he took over in mid-2023 – better than the 36.8% gain in the S&P 500 Industrials Sector index over the same period. The fund charges 0.69% annually.

How Trump could impact infrastructure spending

Generally, most market watchers expect infrastructure spending to continue apace under President Trump. "Historically, spending money on roads, public works, airports, ports and harbors, and various parks has been something that Democrats and Republicans agree on," says Bruce Kennedy, manager of DF Dent Midcap Growth fund. "Representatives like to go back home for a ribbon cutting."

Indeed, changes to any of the three major infrastructure acts – the Infrastructure Investment and Jobs Act of 2021 and the Inflation Reduction Act and the CHIPS and Science Act (both passed in 2022) – will likely be line by line, not a wholesale repeal, says Jake Schurmeier, a Harbor Capital manager of multi-asset portfolios. "Trump is a populist, and 60% of the spending under these acts goes to Republican states, so it isn't in his interest to cut back on spending," he adds.

The $280 billion CHIPS and Science Act passed with a lot of bipartisan support, too. "I expect by and large that will be untouched," says Schurmeier. About $55 billion has been spent, with Intel (INTC), Micron Technology (MU), Taiwan Semiconductor Manufacturing (TSM) and Samsung having received some of the funds.

Most at risk are the environmental tax credits in the $400 billion Inflation Reduction Act. Even so, Republicans will likely "take a scalpel, not a sledgehammer," to the IRA, says John Duncan, a principal with the Meridian Research Group, which provides insight on public policy to investors and corporations. Among the credits likely to go on the chopping block is the $7,500 credit for buyers of new electric vehicles, as well as tax credits for companies that generate clean power (solar, wind) or that develop clean energy technologies.

Finally, Trump's America-first agenda means his administration "has a clear interest in building out America and building up America," says Bob Robotti, founder of Robotti & Company Advisors. Whatever your politics, that bodes well for infrastructure spending and the stocks that will benefit from it.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Today, more than 16 million American households, nearly double the number from a decade ago, have passed an important milestone set by the Securities and Exchange Commission (SEC).

The securities regulator deems any investor, individually or with a spouse, with a net worth of $1 million (excluding their primary residence) an accredited investor.

That means in addition to the stocks, bonds and funds that all investors can buy on public exchanges, the investor can also invest in certain private investments, including hedge funds, private equity, private credit and venture capital opportunities.

(You can also qualify as an accredited investor under other criteria, including income thresholds — a consistent annual income of at least $200,000 for a single person, or $300,000 for a married couple.)

The attraction of the expanded opportunities is fatter returns and improved diversification. Some private investments have outpaced the U.S. stock market over the past five years. But the risks are higher, too. These investments don’t trade on public exchanges, and they aren’t publicly marketed or sold. And unlike publicly traded companies and funds, they aren’t required to publish regular financial statements.

The SEC established the accredited investor threshold to protect investors with limited financial knowledge from risky ventures. So investors who meet the standard are considered financially sophisticated enough to assess the merits of an investment on their own. But even professional investors have been burned by private investments. That’s why wealth managers tell accredited investors to tread carefully.

“You now have access to more than the average Joe,” says Jonathan Lee, a U.S. Bank wealth management adviser. But “just because new opportunities are available does not mean they are suitable” for you, he adds.

Buyer beware. Accredited investor status is not an “open sesame” to all private investments. It’s just the first step up the SEC’s ladder.

More investing opportunities are unlocked for qualified clients, who have $1.1 million in assets with an adviser or a $2.2 million net worth (excluding a primary residence); qualified purchasers, with investment portfolios of at least $5 million, can access even more.

Whether you’re qualified or accredited, proceed cautiously if you buy into a private investment. Be skeptical of pitches from brokers seeking commissions, internet personalities or even friends. Though many private investments are available only to qualified investors, you may be offered a wider set of opportunities if you’re accredited and you work with an adviser.

Put in only what you can afford to lose — and certainly no more than 5% of your portfolio, says Prudence Zhu, a certified financial planner based in Phoenix. Be aware, too, that often the best deals are first pitched to investors who can fork over a seven-figure sum, Zhu says. Small investors tend to get offers the wealthy have passed on and thus may be riskier.

You may need to provide proof, in the form of account statements or tax returns, that you meet the SEC’s accredited investor bar before you invest. And it can be difficult or even impossible to cash out for many years. There may be hidden costs, too. Many private investments require that you fill out a Schedule K-1, which can complicate and raise the cost of preparing tax returns.

Private investments aim to boost your overall return or enhance diversity and smooth out the overall ride of your portfolio. But each comes with certain caveats.

Hedge funds. These aim to deliver positive returns in both bull and bear markets. The funds use a variety of tactics. Long-short strategies, for instance, buy stocks that are expected to rise in value and sell short stocks that are expected to fall in value.

Hedge funds tend to be less volatile than the stock market; the Credit Suisse Hedge Fund index held up better than the S&P 500 index in 2022. The trade-off is tepid returns. Over the past decade, the Credit Suisse index has returned 4.4% annualized.

Most opportunities are limited to qualified investors by SEC mandate and charge a 2% annual management fee plus 20% of any gains. In addition, some of the few private hedge funds available to accredited investors require $100,000 minimums.

Private credit. Private credit includes loans made to companies that can’t, or prefer not to, borrow from a bank. Since the start of 2019 through mid-2024, this asset class has returned 9% annualized, according to market data firm MSCI, beating the Bloomberg Aggregate Bond index, which gained 0.9%. But some private loans aren’t rated by credit agencies, adding a layer of risk. And they’re not easily traded, so you might have to wait until the loan matures to get your money back.

Many private credit funds are limited to qualified purchasers. But accredited investors may be able to participate through their adviser or a growing number of online platforms such as YieldStreet and Percent.

Private equity. Accredited investors can invest directly in private companies or in private funds, available through advisers, that pool stakes in several private firms. Private equity fund managers typically buy businesses, often combining investors’ money with loans against the assets of the business. They attempt to improve the profitability of the business and then sell off the parts or the whole to make money. The fees run about 1.5% a year, and many managers take a piece of any profits, too.

Returns have been rich of late. Private equity funds gained 22% annualized between 2019 and mid-2024, according to MSCI, compared with a 17% annualized rise in the S&P 500. But some private equity deals don’t work out. And many private equity funds bar withdrawals for months or even years and limit, or “gate,” the percentage of shares they will redeem to shareholders each year.

Investors may learn about private equity opportunities from friends, online platforms or advisers. Funds run by big private equity firms, such as Apollo or Blackstone, are typically available only through advisers.

Venture capital. These investments finance start-ups, typically, to help them develop or roll out new products or services. The goal is to hold on until investors earn a return, which can occur if the company is acquired or goes public. But most burgeoning businesses fail before either occurs.

Venture capital returns have been volatile recently. After notching better than 50% annual returns in 2020 and 2021, VC funds lost ground in each of the next two years, according to MSCI. And through June 2024, the most recent date for which data is available, VC funds are up just 1.0%.

Accredited investors can participate in a VC fund-raising round, but in most cases, they must have the right connections—for instance, as “friends or family.” Otherwise, crowdfunding online platforms, such as Republic and StartEngine, offer accredited investors access to VC opportunities for as little as $100.

Some advisers may also offer access to VC funds, though many require six-figure investments.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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This news prompted us to check in with the Vanguard Emerging Markets Bond Fund (VEMBX) – a member of the Kiplinger 25, our favorite no-load mutual funds.

Managers Dan Shaykevich and Mauro Favini invest mostly in dollar-denominated government debt issued in developing countries. At last report, the fund held 13% of its assets in African IOUs. That's a greater percentage than in the fund's benchmark, the JPMorgan Emerging Markets Bond index, but less than that of the fund's typical peer.

The managers are not worried, though. Despite the hefty debt burden in Africa overall, defaults in African sovereign bonds so far have been small in size relative to the benchmark, says Favini. And the "overall asset class of dollar-denominated emerging-markets debt hasn't experienced material drawdowns or contagion,” he says.

Meanwhile, the fund is still outpacing its peers. Over the past 12 months, it returned 14.4%, beating 65% of other emerging-markets bond funds. A "cautious" positioning heading into 2024 contributed to the fund's performance over the past year. The managers took profits in their "down-in-quality" holdings, for instance.

Making the right macroeconomic calls in 2023 helped, too, says Favini. Among them: Bumping up the fund's duration, a measure of interest rate sensitivity, to 6.5 years from 3 years. Bond prices and interest rates move in opposite directions, so a duration of 6.5 years implies that if rates fall by one percentage point over the course of one year, the fund's net asset value will rise by 6.5%. Over the past 12 months, some emerging central banks, including China, Brazil and Mexico, have cut interest rates. The fund yields 6.4%.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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That goes a long way to explain why the T. Rowe Price Dividend Growth Fund (PRDGX) – a member of the Kiplinger 25, our favorite no-load mutual funds – has lagged the S&P 500 over the past 12 months. 

The fund owns Microsoft (MSFT) and Apple (AAPL), but not Nvidia (NVDA), Alphabet (GOOGL) or Meta Platforms (META), three of the biggest gainers over the past year. "It's been a tough relative period for anyone who's an income-oriented investor," says the fund's manager, Tom Huber. "But on an absolute basis, the fund has done well." Dividend Growth has gained 16.3% over the past 12 months; the S&P 500, 21.5%. 

Increasing dividends matter more than yield at this fund. Huber favors large, competitively positioned firms that generate cash and have a goal to increase payouts over time. The fund's overall average dividend growth rate, 9.8% over the past 12 months, exceeds that of the S&P 500, which typically ranges between 5% and 7%, says Huber. 

High interest rates have also been a hurdle for this dividend-stock fund; investors can earn fatter yields in money market funds. But rates are likely to fall in the coming months, which may turn investor attention toward dividend stocks again, says Huber. 

Meanwhile, Huber is nibbling in discounted sectors, including consumer staples, energy and healthcare. Coca-Cola (KO) is a "quality company," he says, "that trades at a price-earnings multiple you haven't seen in a really long time." 

And since the collapse of oil prices during COVID, many energy stocks, including Conoco-Phillips (COP), yielding 2.9%, and Exxon Mobil (XOM), yielding 3.2%, have become smarter about how they spend their extra cash. He's also a fan of discount retailer Dollar General (DG), which is benefiting from consumers seeking relief from higher prices.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Vanguard locked new investors out of Primecap in 2004 and out of Core in 2009, limiting existing investors to adding no more than $25,000 a year. The funds’ strong performances had attracted more money than the managers felt they could put to work in the long-term, value-priced growth opportunities they seek.

But in recent years, performance — especially at Primecap — has been lumpy. Investors have withdrawn more than $38 billion from Primecap since 2019 (leaving it with assets of $76.1 billion), and nearly $5 billion from Core (now with $13.2 billion). And, says Ryan Barksdale, who oversees Vanguard’s active stock funds, “the market has evolved,” creating new investment opportunities for additional cash. Both funds require a minimum initial investment of $3,000 for investor-class shares.

The two funds hold many of the same stocks. Both are tilted toward health care and industrial firms, and have benefited from a boom in Eli Lilly, which makes up more than 10% of each portfolio. Lilly has returned 94% over the past 12 months. 

Although it can invest in stocks of any size, Primecap is currently weighted slightly more toward large companies. Charging an expense ratio of 0.38%, it has returned 27.5% over the past 12 months, beating the 24.6% return of the S&P 500. The fund gained 15.5% annualized over the past 15 years, compared with 14.8% for the S&P 500. Core, with expenses of 0.46%, has returned 25.4% over the past year; 14.7% over the past 15 years.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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If you want your AI investing to pay off over the long term, you need to have a solid understanding of your options before allocating any of your resources. You want to study the industry, your investment avenues and key considerations such as illiquidity and creditworthiness.

Let’s explore the unfolding world of AI and how to make informed decisions as you invest through mutual funds, exchange-traded funds (ETFs) and individual companies.

Recognizing AI's investment allure

Let’s start with the obvious: AI is exciting. Its allure is drawing billions of investment dollars — and with good reason. AI is the real deal. AI is rapidly transforming industries, and the investment world is no exception.

In my time working at the Fintech Finance Group, we’ve never seen an industry-changing technology with quite this degree of potential. From composing text and making personal suggestions to driving the Fourth Industrial Revolution, this technology is touching every part of life as we know it.

As an investor, it’s easy to see how this exciting new frontier offers significant potential returns. As AI technology continues to disrupt markets, its near-limitless utility means it may be a good time to invest in this growing area. 

With that said, investors should remember that AI is a relatively young field — and as is the case with any fledgling market, there are inherent risks involved. That means you want to make informed investments, maintain exit strategies and remember to stay diversified.

Considering AI investing avenues

Believe it or not, Nvidia (NVDA) isn’t the only AI company out there. I kid, but I hope you see the point. There are multiple ways you can gain exposure to AI’s profit potential in your investment portfolio, and at this point, many of these alternatives may have more upside than Nvidia and its bloated market value.

The obvious avenue here is to invest directly in publicly traded companies. Yes, Nvidia is one of these. But there are many other AI-focused brands, such as Microsoft (MSFT), Alteryx (AYX) and Palantir (PLTR), that are applying bleeding-edge AI technology in a variety of industries and functions.

In theory, each of these has the potential for high returns. However, you want to conduct in-depth research with every company to understand their market position and what sets their technology apart. Consider how established they are and how each company’s risk level affects your portfolio’s overall stability.

You can also invest in AI using ETFs and mutual funds. These represent collections of AI-related companies, naturally spreading out both risk and reward. This provides a lower barrier to entry for investors with less capital and can make it easier to “set and forget” your artificial intelligence investments for the long term.

Going beyond the headlines

Along with each individual investment channel, you want to consider the nuances of AI investing currently. For example, illiquidity is particularly relevant to private company investing. 

How easily can you sell the shares of each AI company that you invest in? If they’re publicly traded, this could be no issue. If you’re an angel investor or venture capitalist getting in on the action early, though, you may have a tougher time exiting a position.

You also want to evaluate creditworthiness if you’re directly loaning money to AI startups and smaller companies. Is there a clear timeline for the borrower to eventually repay the loan (with all due interest)?

Making informed decisions

If you want to invest in AI successfully, you must grasp both the potential reward and the inherent risk that comes with each opportunity. Do your research. Stay aware of your risk tolerance. Make sure your portfolio stays diversified. Keep your investment goals top of mind.

If you find your portfolio is lopsided, or you aren’t sure about the risk-reward of an AI investment opportunity, remember to consult with a qualified financial adviser. They can provide insights that are particularly invaluable when you are venturing into new investment territories such as the promising but precarious AI revolution.

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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

For that reason, we set out to find the top-performing actively managed funds over the past 10 years in each of the nine stock fund style categories defined by Morningstar. The financial data firm divides funds into those focused on growth, value or a blend of the two, invested in large-, small- or midsize-company stocks. 

Our final list includes funds that employ a variety of strategies, which we highlight below. We didn’t originally intend to exclude index funds, but frankly, few rose to the top — except in the large-company growth category (which includes funds that track the Nasdaq 100 benchmark and so happen to be stuffed with the tech behemoths that have dominated the market lately). Given the slim showing, we decided to focus on actively managed U.S. stock fund winners. 

These aren’t the top performers in every category. We only considered funds that are open to new investors, require reasonable minimum initial investments and have had at least one manager in place for the entire decade. That eliminated some standout funds with newer managers, including Fidelity OTC, T. Rowe Price U.S. Equity Research and Parnassus Value Equity (formerly known as Parnassus Endeavor). 

Most of the funds have above-average expense ratios, and a few are load funds (but all are available with no transaction fee or sales charge from major brokerage platforms). It’s important to note that a place on this list does not equal a Kiplinger recommendation.

Still, funds that owned the decade deserve looking into. Read on to learn more about the winners, listed in alphabetical order within their fund categories. All data and returns are through May 31, unless otherwise noted. 

Large-company stock funds

Fidelity Blue Chip Growth (FBGRX). Since Sonu Kalra took over management duties at Fidelity Blue Chip Growth in mid 2009, he has steered the fund to an 18.8% annualized gain, handily beating the S&P 500 index and peer large-company growth funds. His fund’s 10-year annualized return, a whopping 17.5%, topped all the other portfolios highlighted in this story, too. By comparison, the S&P 500 gained 12.7% annualized. The fund charges a low, 0.48% annual expense ratio.

Kalra aims to invest in companies that can sustain healthy growth rates for long periods of time. He likes to get in early and hold. Most of the fund’s 260-stock portfolio is made up of companies that he says are beneficiaries of long-term growth themes, such as e-commerce, cloud computing, generative artificial intelligence, and health and wellness. Most of the fund’s top holdings fall in this secular-growth category, including Amazon.com (AMZN), Alphabet (GOOG) and Apple (AAPL), and they have been in the portfolio for well over a decade. “That’s a sign we’re doing our job well,” Kalra says. 

Much of rest of the portfolio is devoted to companies with shares that might be flagging but are poised to benefit from a cyclically driven growth phase (energy stocks during COVID, say, or housing stocks when that industry is in a slump). A smaller group, which Kalra calls “self-help stories,” are businesses with a new manager or product (think of a retailer, for instance, with a growth driver that’s underappreciated). 

But the fund’s stake in private companies sets Blue Chip Growth apart. They make up just 3% of the fund’s assets, but, Kalra says, “the private placements allow me to build a relationship with a company years before it goes public. So by the time it does, I have conviction on whether to buy it or not.” He owned a small stake in Facebook, now Meta Platforms (META), before it went public in 2012. After its IPO, the stock lost half its value, but Kalra bought more shares because he had confidence the company would do well, especially after it enhanced its smartphone app to boost advertising revenues. Meta stock, now a top-10 holding, has increased an average of 23% per year since its IPO (a 12-fold climb from its opening price).

Natixis U.S. Equity Opportunities (NEFSX). Two subadvisers divide the assets in this large-company stock fund. Roughly half of the fund is run by the folks who manage the vaunted Oakmark value fund, namely Bill Nygren, Michael Nicolas, Robert Bierig and Michael Mangan at Harris Associates. A growth-tilting stock-picking team from Loomis Sayles, led by Aziz Hamzaogullari, manages the other half of the assets. The end result is a large-blend fund. 

Over the past 10 years, the fund’s 13.1% annualized return outpaced the S&P 500. But in truth, the fund’s performance has been spotty. U.S. Opportunities has lagged the benchmark in six of the past 10 calendar years (2022, 2021, slightly in 2019, 2018, 2016 and 2014). Average returns with high risk are characteristic of the past three years, according to Morningstar. It’s reason to be a bit wary of this fund. Its annual expense ratio, 1.09%, ranks above average for its category. 

Value guru Nygren and his team aim to purchase shares in large-capitalization companies that trade at least 30% below the team’s estimate of the companies’ intrinsic value, or true business value. But growth can be a value in their book. Meta Platforms (META) and Alphabet (GOOG), for instance, were among Nygren’s holdings at certain points over the past decade. “The opposite of cheap isn’t growth,” Nygren is famous for saying; rather, “it’s expensive.” The track record of Nygren’s Oakmark fund, which is run in a manner similar to the way he runs his portion of this Natixis fund, ranks among the top 3% or better of its peer group (large-company value funds) over the past five, 10 and 15 years.

Meanwhile, Loomis Sayles’s Hamzaogullari and his team run their portion of U.S. Equity Opportunities using a seven-step process that targets companies that have high barriers to entry or a competitive edge in their industry, throw off plenty of cash, and have good executives at the helm who have the long term in mind (not a quarter-to-quarter mind-set). Also, price matters: Hamzaogullari is only interested in purchasing shares if the company’s stock trades below his estimate of the company’s intrinsic value. Hamzaogullari is also behind Loomis Sayles Growth fund, which ranks in the top quartile of large-company growth funds over the past three and 10 years. Nvidia has been a top-performing pick for the Loomis half of U.S. Equity Opportunities over the past year. 

Smead Value (SVFAX). Value stocks have been out of fashion for most of the decade, which makes Smead Value’s 12.0% annualized 10-year return notable. That doesn’t outpace the S&P 500, but the large-company value fund ranks among the top 1% of its peers, despite a high annual expense ratio of 1.24% (above average for its category). 

Its secret? “We’re probably dead wrong 30% of the time, so we spend a lot more time trying to figure out where we were wrong than where we were right,” says longtime manager Bill Smead, who has an impressive memory for historical market data. He runs the fund with his son, Cole.

Over the years, they’ve learned from their mistakes. One thing they’ve found is that it pays to hold on to winners. Besides the low cost of an index fund, “the S&P 500 has an advantage over active stock pickers: low turnover,” says Smead. S&P 500-trackers “hold their winners to a fault.” So he does, too. Smead first bought stock in biotech firm Amgen (AMGN) in 2011, for instance, when it traded at $52 a share and a price-earnings ratio of 11. “Today, it’s a $300 stock and has paid out massive dividends,” he says. The fund’s typical holding period is about seven years. 

Companies in the portfolio must fulfill an economic need, have a strong competitive advantage in their industry and a long history of profitability, generate high levels of free cash flow (money left over after expenses to operate and invest in the business), and trade at a low price relative to their intrinsic value. Top holdings include American Express (AXP) (which Smead describes as “the Mother Teresa of financial firms”), Occidental Petroleum (OXY) and Merck (MRK).

The portfolio’s 28 stocks trade at an average P/E of 14 and boast average cash-flow growth of nearly 12%. Compare that with the S&P 500’s average P/E of 21 and cash-flow growth of 9%. “Our companies are superior to the S&P 500, and you’re getting them at a bargain to the S&P 500,” he says. With his portfolio holding none of the enormous companies that currently dominate the market, Smead calls his fund the “antidote” to the problem of mega-cap concentration in the S&P 500. 

Mid-size company stock funds

Baron Focused Growth (BFGFX). “Our favorite holding period is forever,” says David Baron, who runs the Focused Growth mid-cap growth fund with his father, Ron Baron. They like to invest in growing businesses that they believe can double in market value within five to seven years. The Barons typically keep the portfolio to a trim 20 to 30 stocks, getting in early when companies are small to midsize—the younger Baron says this is “a SMID fund”—and holding on as long as their investment thesis still stands. Stocks in small and midsize firms make up three-fourths of the fund; large stocks account for 11%.

Focused Growth currently holds 34 stocks. That’s higher than usual, says David, because the fund had 10% of assets in cash about 18 months ago that the Barons have since put to work in a stack of new opportunities, including sneaker company On Holding (ONON) and Spotify Technologies (SPOT). 

The fund’s 10-year annualized return of 15.3% ranks among the top 2% of mid-cap growth funds—beating its benchmark, the Russell 2500 Growth index, which gained 9.4% annualized, as well as the S&P 500. But from the start of 2014 through 2016, Focused Growth lagged its peers in a big way, thanks in part to Tesla (TSLA), which was teetering toward bankruptcy then. “That was a tough time in the market,” says David. “We’re okay not making money in stocks for two to three years. As long as we can get the double in four to five years, we’ll continue to invest in the stocks if they’re trading at attractive prices.” Tesla is the top holding in the fund today. “Musk’s balance sheet has no debt, and he’s sitting on $28 billion in cash—and that’s after spending $10 billion this year on capital expenditures,” David says.  

In other words, the Barons are willing to be patient with Tesla. Other times, however, they’re inclined to sell. The pair owned Penn National Gaming (now Penn Entertainment (PENN)) in the early 2020s, but a couple of acquisitions left the balance sheet with too much debt, David says, and the firm was “spending in the wrong places.” They unloaded their stake in 2023. 

Baron Focused Growth has outpaced its peers and its benchmark in six of the past 10 years. Volatility is high, though aggressive investors may find the rewards worth the risk. The fund’s expense ratio is 1.32%, above average for its peer group.

Diamond Hill Select (DHTAX). Small- and midsize-company stocks dominate the portfolio of Diamond Hill Select, but the fund can invest in companies of any size. Its benchmark is the Russell 3000, which tracks about 96% of the investable U.S. stock market (the S&P 500 covers 80%). 

Austin Hawley and Rick Snowdon have run the fund since 2013. They call themselves “intrinsic value investors,” which means they like a good bargain, but they also consider a firm’s growth prospects, too. (Morningstar currently classifies the fund as mid-cap value.) When big tech names sold off in early 2022, Hawley and Snowdon picked up stakes in Microsoft (MSFT), Alphabet (GOOG) and Amazon.com (AMZN). Those moves helped the fund deliver a 30.2% gain in 2023, beating the Russell 3000 and the S&P 500. The managers sold their stakes in Alphabet and Microsoft at different points in 2023 as those share prices moved up significantly, but they still own Amazon. 

The fund is trim (hence the “Select” part of its name), holding just 28 stocks at last report. That may explain why it has been more volatile than other midsize-company funds over the past 10 years, though its returns have made up for the added risk. Over the past decade, its annualized return of 10.8% didn’t beat the broad market, but it outpaced 97% of its peer group. For context, the Russell 3000 gained 12.1% annualized over the same period. And the fund’s five-year annualized return even surpassed the S&P 500. Its greatest hits over the past decade include mortgage-servicing company Mr. Cooper (COOP) (formerly Nationstar Mortgage Holdings) and Wesco International (WCC), a leader in electrical, communications and utility distribution. 

Investors should note, however, that the fund’s Morningstar style classification tends to shift. Select has been in Morningstar’s mid-cap value category since the start of 2021, but between 2015 and 2020 it was considered a large-cap blend fund, and in 2014 it was called a large-cap value fund. “I don’t think there’s a good peer group for the fund, and that’s a challenge for a strategy like ours,” says Hawley, who adds: “We believe it’s a benefit to have an all-cap universe. It allows us to capitalize where we see the best opportunities.” The fund charges an above-average fee of 1.16%.

FAM Dividend Focus Fund (FAMEX). Paul Hogan, the founder of FAM Dividend Focus, likes to take the long view: “We really think in terms of decades when we pick businesses for the fund.” One of the mid-cap blend fund’s original holdings from its launch in 1996 is still in the portfolio, and a number of holdings go back to the early 2000s. 

As the fund’s name implies, dividends are key. Every company in the fund pays one. But a high yield isn’t the focus. “That dividend has to be growing,” says Hogan, who took on a comanager, Will Preston, in 2020. “We want to see a history of dividend growth and that it will continue to grow at a good clip.” 

If a company cuts or stops paying its dividend, that’s an “automatic disqualifier,” says Preston. “We’re not going to own that stock anymore.” But if the payout remains steady for a year or so, that’s okay. For the 12-month period ending April 25, 23 of the fund’s 26 stocks increased their dividend, by an average of 9%. 

Of course, other measures matter, too, when Hogan and Preston pick stocks. They’re looking for company access (they visit every company they own at least once a year), ethical managers, and a high and increasing rate of return on the capital invested in the business (a profitability measure known as return on invested capital). Among the many other factors the managers consider when they assess a company’s quality are whether the chief executive knows most of the employees by name and whether the executive team is willing to take a pay cut to keep the factory going during a global pandemic.

Companies have to be midsize at the time of purchase, as defined by the Russell Midcap index (its current average market value is more than $26 billion), but Hogan and Preston let their winners run. “The fund’s best performers grow to be the largest holdings in the fund, and that’s the largest source of our outperformance versus peers and the index,” says Hogan. The average market value of the fund’s top holdings, for example, is $48 billion. Trane Technologies (TT), the HVAC system company, has a $74 billion market value and has been in the fund since 2015; medical-equipment maker Stryker (SYK), with a $126 billion market value, dates back to 2009. 

Resisting the urge to trim winning stocks “leads to low fund turnover and low taxes,” says Hogan. It helps keep a lid on risk, too. Over the past three, five and 10 years, FAM Dividend Focus has delivered well above-average returns with below-average volatility. “You’re taught in business school that if you want high returns you have to take on high risk, but that’s not the case with this fund at all,” says Hogan. 

The fund’s 11.6% annualized return over the past decade ranks among the top 5% of all midsize-company blend funds. That’s net of expenses, which are 1.22% per year—above average for its peers. And its 10-year record beats the 9.5% return in the Russell Midcap index, too. Even more impressive, the fund has outpaced its peer group in nine of the past 10 years. “These results are repeatable for us because we’re not chasing an economy reopening story, or interest-rate cuts or interest rates going up,” says Hogan. “We don’t have to do that. We simply own quality companies where customers have to or want to do business with.”

Small-company stock funds

Hennessy Cornerstone Mid Cap 30 (HFMDX). This fund has the term “Mid Cap” in its name, but it skews small, with an average market value for stocks in the fund of $5.4 billion. The managers of this small-cap value fund use four simple steps to choose 30 stocks. 

The aim is to buy undervalued companies with proven sales and earnings growth. The process starts with company size—only companies between $1 billion to $10 billion in market value are considered—and a price-to-sales ratio of less than 1.5. Next, annual earnings must be higher than the previous year (the companies don’t have to be profitable, but earnings must be trending in a positive way), and shares must have posted a positive gain in price over the past three and six months. And that’s basically it. 

The four-step process whittles a list of about 5,000 down to roughly 100, which are then ranked by 12-month returns. The top 30 become the portfolio. The fund’s assets are equally divided into the 30 names, and then the managers leave the portfolio alone for a year, rebalancing typically in the fall. “We try to only have long-term gains whenever possible,” says Ryan Kelley, who manages the fund with Neil Hennessy and Joshua Wein.

It’s a simple process that has not changed over the fund’s 21-year history. The results? A 12.2% annualized gain since inception in 2003, which beats the small-cap benchmark, the Russell 2000, as well as the S&P 500. Over the past decade, the fund boasts a 12.2% annualized return, shy of the S&P 500’s gain but ahead of the 7.7% average annual gain in the Russell 2000. “The reason we like this process is that it takes the emotion out of investing,” says Kelley. The fund’s expense ratio, 1.34%, is above average for its peer group.

Needham Aggressive Growth (NEAGX). Small-company stocks are the focus at Needham Funds. “It’s all we do. We live and breathe these companies,” says John Barr, longtime manager of small-company growth fund Needham Aggressive Growth. 

Barr focuses on under-the-radar companies that are investing in a new product or service that’s poised to boost the firm’s results. To provide stability, he says, the company’s new endeavor must be funded by a legacy or established business that’s profitable or generating cash—not by debt. 

Over the past decade, that process has delivered chart-topping returns to shareholders. The fund’s 10-year annualized return, 15.3%, walloped the Russell 2000 small-company index, as well as the S&P 500. 

The ride has been bumpy, but that’s a given—small-cap stocks tend to be more volatile than their larger brethren. It’s worth noting, however, that Needham Aggressive Growth has been a tad less volatile than the typical small growth fund, as well as far more rewarding. 

Taking the long view and holding on to winners past the small-cap stage is part of Barr’s game. “The challenge is just to hold on and not sell,” he says. He’s drawn to firms run by founders, families or long-tenured executives “because they think long term,” he says. The fund owns shares in nearly 80 companies and typically holds for eight to 10 years. Its top holding, Super Micro Computer (SMCI), has been in the fund since 2009 and is a “100-bagger for us,” Barr says. 

He likes to get in early, buying stakes in promising, mostly micro-cap-size companies he calls “hidden compounders.” If successful, they shift into what Barr calls the “transition compounder” stage, when the company’s new venture starts to impact results. Eventually, good companies grow into “quality compounders,” or leaders in established—but growing—markets. Half of the hidden compounders make it to the transition stage, and then only about 20% become quality compounders. 

Among many memorable winners over the past decade are two semiconductor industry players, Nova (NVMI) and Entegris (ENTG), both longtime holdings that are still in the portfolio. Each has climbed more than 11-fold in price over the past decade. Barr remembers some losers, too, such as Dirtt Environmental Solutions (DRT), a Canadian maker of premanufactured walls and systems for the construction market. He bought shares in 2017 then watched the stock tank, selling in 2020 at roughly a 60% loss.  

Small-cap stocks have lagged the broad market over the past decade, but “there are small caps out there that have done well and continue to do well,” says Barr, adding that he’s found success in part by focusing on firms with good balance sheets that throw off cash, operating in steady businesses that are less vulnerable to the whims of the consumer. The fund’s annual expense ratio, 1.82%, is well above average for its peer group. 

Thrivent Small Cap Stock (TSCSX). To avoid value traps, or stocks that are cheap because they deserve to be, the managers at Thrivent Small Cap Stock give prospective companies what fund comanager Jim Tinucci calls the “APGAR test,” the name for the health screen that newborn babies receive just after birth. But instead of gauging skin color, muscle reflexes and heart rate, Thrivent’s small-company test focuses on industry and company growth, competitive advantage, size of the total market that the company attempts to address, and whether key profitability yardsticks measure up. 

Firms that fail the test don’t get a closer look. “Value traps are companies in industries that don’t grow and are already fully penetrated,” says Tinucci, who manages the fund with Matthew Finn and Katelyn Young. “So, in our first look, we’ll know if this is a business we want to do further work on or not.” When they invest in a stock, its market value must fall at or below that of the largest firm in either the Russell 2000 ($49 billion in late April) or the S&P SmallCap 600 index ($8 billion).

Something about the manager’s APGAR test for small companies is working, because this small-cap blend fund has outgunned the Russell 2000 over the past decade. Its 10-year annualized gain of 11.4% ranks among the top 2% of its peer group. By contrast, the Russell 2000 has a 7.7% annualized return. Thrivent Small Cap Stock charges a below-average 0.81% expense ratio, according to Morningstar. The fund typically holds between 80 and 120 stocks. Its longest-held stock, Curtiss-Wright (CW), makes equipment for the aircraft and naval defense industries. Since early 2014, when the fund first purchased it, the stock has more than quadrupled in price

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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But uncertainty about the path of interest rates can destabilize bonds, too, so price swings have continued into 2024. "It's been a challenging time," says Elizah McLaughlin, who manages the Fidelity Intermediate Municipal Income Fund (FLTMX) with Cormac Cullen and Michael Maka. 

Even so, over the past 12 months, Intermediate Municipal Income – a member of the Kiplinger 25, our favorite no-load mutual funds – turned in a 2.7% return, which outpaced the 2.1% gain in the Bloomberg Municipal 1-15 Year index. 

"Our goal is to deliver a consistent risk-adjusted return," says McLaughlin. "We're not trying to shoot out the lights every year."

She and her cohorts focus on municipal bonds, which pay income that is exempt from federal taxes. Their process is very "collaborative," which McLaughlin says differentiates their fund from others. 

The managers work with 13 fundamental analysts, three dedicated traders and a quantitative analyst. They sit together in a custom-designed space in Merrimack, New Hampshire, where most of Fidelity's bond pickers are based. "It's just a constant flow of information," she says, adding that the depth of research the team puts into securities is another differentiator. "That's where our expertise comes into play," says McLaughlin. 

That know-how helped this past year. The Fidelity mutual fund is heavily tilted toward revenue bonds, which are IOUs for projects such as toll roads that generate income to pay off bondholders. Some of these bonds tend to be less volatile when interest rates are rising, which helped the fund's performance in the early part of the past 12 months. 

In more recent months, the fund's heftier stake in revenue bonds with single-A, triple-B and lower credit ratings, relative to the benchmark, boosted the fund's return. Intermediate Muni Income yields 3.4%, a tax-equivalent 4.5% for investors in the 24% federal income tax bracket. 

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The funds offer a simple way to diversify. For example, if your stock portfolio is heavy on shares of individual technology and energy companies, balancing those holdings with ETFs in sectors such as real estate and healthcare can provide a smoother ride. And a sector fund could make sense if you have a strong conviction that a particular area of the economy, such as finance, is underappreciated and will accelerate as investors recognize its true value.

I have been analyzing long-term data on Select Sector SPDR ETFs, which are managed by State Street and based on indexes that are subsets of the S&P 500 index, the large-company benchmark. Some of the results are striking. 

As you can probably guess, one sector has been a standout performer: technology. For the past 10 years, the average annual returns of seven out of the nine sector funds I studied fell into a narrow range, from 8.2% to 12.3%, but the Technology Select Sector SPDR Fund (XLK) averaged 20.7%. The tech fund was dominant throughout the decade: It was the top-performing sector fund in four of the past 10 calendar years and ranked in the bottom half only twice. 

But you might be surprised at how some companies that most of us consider technology holdings are classified by S&P (and, therefore, State Street). For example, Amazon.com (AMZN, $180), which returned an average of 26.8% over the past 10 years, is in the consumer discretionary sector ETF, and Alphabet, Netflix (NFLX, $607) and Meta Platforms (META), the former Facebook, are all in the communications services sector fund. (Prices and other data are as of March 31 unless otherwise noted.) 

Not including such stocks is a real drawback. That’s why I prefer Invesco QQQ Trust (QQQ, $444), which owns the largest Nasdaq companies, including all of the SPDR omissions. The ETF carries an expense ratio of 0.2%, compared with 0.09% for the State Street funds, an insignificant difference. 

The other outlier over the past 10 years has been energy. The SPDR fund returned an average of just 4.6%. The sector was highly volatile, ranking first in three of the past 10 calendar years and last in six. 

Sector fund returns converge... eventually

Although the returns of sector funds are scattered over 10 years, they converge over very long periods. State Street introduced the original nine sector ETFs in December 1998. (Real estate was added in 2015; communications services in 2018.) On average, during the 25 years ending in December 2023, the sector funds in existence — with one exception — returned between 6.8% and 9.5%. 

The laggard was the financial ETF, at just 5.1%. Banking suffered badly in the 2008–09 recession, and low interest rates during the entire period hurt profitability. Tops over 25 years was the consumer discretionary category, which edged out tech, health care and industrials (all within nine-tenths of a percentage point of the leader). 

The Consumer Discretionary Select Sector SPDR (XLY, $184), which ranked second over the past 10 years, includes automobiles, hotels, restaurants, entertainment and many retailers. There’s much to like in this sector, which performs well when the economy is strong, but the fund itself has become top-heavy, adding to risk by subtracting the benefits of diversification.

The two leading holdings — Amazon and Tesla (TSLA) — account for 36% of the fund’s assets. Tesla’s miserable performance at the start of 2024 was a major reason the fund trailed the S&P 500 by seven percentage points for the year to date. Still, I am recommending the ETF for its powerful portfolio, including McDonald’s (MCD, $282), Starbucks (SBUX, $91), Home Depot (HD, $384) and several homebuilders. 

One revelation from an examination of sector performance is that every ETF has rotten years. In 2022, tech finished eighth out of the nine original categories. Health care was second among the sector ETFs in 2014 and 2015 but last in 2016. You simply cannot predict how a sector will perform from year to year. 

Can you balance sector holdings?

For that reason, I believe a popular investment strategy called sector rotation is foolish. The idea is that you create a portfolio with disproportionate weight in certain sectors during particular phases of the business cycle and then move out of them as economic and market conditions change. For example, sector rotation favors utilities during the early stages of a recession and consumer staples during a late recovery. The strategy generates fees and time-wasting activity as you switch holdings, and there’s no evidence that it works. 

“At best,” an academic paper titled “The Myth of Business Cycle Sector Rotation” found, “conventional sector rotation generates modest outperformance, which quickly diminishes after allowing for transaction costs and incorrectly timing the business cycle.” Timing the business cycle is a futile endeavor. In 2022, most economists predicted a recession was coming the next year. But gross domestic product rose 2.5% in 2023, a rate that beat the average for the decade before COVID-19 hit. 

There are, however, good reasons for investors to put more emphasis on particular sectors. Technology has become the main engine of the U.S. economy. But I also like ETFs based on sectors that are out of favor, especially the Financial Select Sector SPDR Fund (XLF, $42), which returned an annual average of 10.9% over 10 years — compared with 12.9% for the SPDR S&P 500 Trust (SPY, $523), nicknamed “Spiders,” which reflects the entire large-cap benchmark. 

The financial SPDR fund has its own odd characteristics. Its top holding, at 13.1%, is Berkshire Hathaway (BRK.B, $421), even though Warren Buffett’s company invests half its assets in tech (mainly Apple) and about one-fifth in finance (nearly all in insurance). Owning a bit of Berkshire, however, is never a bad idea. The rest of the fund is conventional: JPMorgan Chase (JPM), Visa (V) and the like. Another good choice is the Vanguard Financials Index Fund (VFH, $102), which is more broadly diversified and has a similar 10-year record. 

My other preference for the next 10 years or so is the Health Care Select Sector SPDR Fund (XLV, $148). The population is getting older, therapies are getting better, and artificial intelligence will make care cheaper. BlackRock has ETFs that drill even deeper, such as the iShares U.S. Medical Devices ETF (IHI, $59), whose top holdings include Intuitive Surgical (ISRG, $399), which manufactures minimally invasive surgical systems such as da Vinci. 

Many investors, especially those with time horizons of 20 years or more, don’t need sector funds at all. Unless you need to balance a port-folio or have a strong belief in a certain part of the economy, you can get diversification the old-fashioned way simply by owning an S&P 500 fund such as Spiders or the Fidelity 500 Index Fund (FXAIX), a mutual fund that returned an average of 13% annually for the past 10 years, beating every sector fund except technology.  

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. Of the stocks and ETFs mentioned, he owns Amazon.com, Berkshire Hathaway, Starbucks, Invesco QQQ Trust and SPDR S&P 500. Reach him at JKGlassman@gmail.com.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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I often find that beginning investors want all the upside of the stock market and get upset when they see the market fall. Many times, they will pull the trigger too early and sell. They don't realize that markets will have dry spells and that some volatility is inherent in the investing process.

But how can folks avoid some of these investing mistakes? Here are some simple rules to follow when first starting your investing journey. The goal, we hope, is to help you avoid typical beginner investing mistakes.

Prepare for volatility. Unless you put all of your money into certificates of deposit (CDs) or money market funds, you can expect to see some variability in your returns. One tool to gauge how volatile a specific stock is in relation to the broader equities market is its beta. 

The S&P 500 has a beta of 1.0. So, a stock with a beta above 1 typically means it is more volatile than the broad market, while a beta below 1 signifies that the equity is less volatile.

Don't invest money that you've set aside for emergencies. Emergency funds are important and we have them for a reason. Leave enough cash to have in case of emergencies or being let go from work. Put this money in a high-yield savings account or even your checking account that you can easily access. 

Ideally, you have enough saved to cover at least three to six months of living expenses. By not putting this money in the stock market, it will not be subject to any kind of volatility or sudden price drops. Additionally, emergency funds should not be put in a CD or similar account where there are withdrawal penalties.

Don't borrow money to invest. Investment returns are not guaranteed, especially in the short term. You could end up paying more in interest and being stuck in more debt if you borrow money to buy stocks. 

Along similar lines, don't use money that should be spent on paying down current debt. Debt reduction comes ahead of investing. Once this is under control, especially with your credit cards, you can put the after-debt excess in various investment vehicles.

Build a pyramid of liquidity. For example, keep some of your excess cash in easy-to-reach vehicles such as savings, checking or money market mutual funds at a brokerage firm. This will allow you to leave your best long-term investment stocks in your portfolio and grow their returns over time.

Diversify slowly. After that, some portion, not the bulk of your excess investment assets, can be put in CDs. Don't put all this excess money into stock market funds. This will allow for a no- to low-risk way to grow your money. And rates are attractive right now, with several 1-year CD rates above 5%.

Money market accounts also give folks a safe place to store their money and get a decent rate of return. Some of the best money market accounts right now are offering yields over 5%.

Study your investing options. Still, arguably the best way to grow your money over time is in the stock market. For beginners, investing your hard-earnings cash in the stock market is best handled by first buying mutual funds, especially no-load mutual funds that don't have a commission or sales charge, and/or low-cost ETFs (exchange-traded funds). These are baskets of equities that spread the risk around, and investing in these first will allow you to develop a feel for the intricacies of the equities market.

Only after doing that for some period should you venture out and invest in individual stocks.

Stick with dividend-paying stocks. The best outcome over time for both beginning investors and long-time market participants is to buy stocks with larger market capitalizations (i.e., over $100 billion in market value) that pay regular dividends. 

An example of one of the best dividend stocks around is Coca-Cola (KO), which has a roughly $260 billion market cap and has paid out and raised its dividends annually for the past 62 years. If you don't believe us, just ask Warren Buffett, who first added KO to the Berkshire Hathaway equity portfolio back in the 80s. In his 1988 letter to Berkshire shareholders, Buffett said he expected to hold on to the stock "for a long time" and indeed he has.

Don't invest in speculative stocks. Avoid tip stocks (someone gave you a tip about a potential high-flyer) with no earnings, no dividends and a small market cap.

The best stocks to buy are those that you can live with over a long period. Don't try and make a killing with your first investing forays. The odds are arguably not going to be in your favor. This is especially true with penny stocks and/or cheap stocks trading below $5 to $10 per share with no dividends. 

Among the many reasons to avoid these low-priced stocks is the lack of liquidity, or the number of shares being bought and sold. This makes the stocks "the perfect vehicles for "pump-and-dump" schemes where stock promoters lure investors to buy shares, increasing the stock price," writes Dan Burrows, senior investing writer at Kiplinger, in his feature on why you should stay away from penny stocks. "Once the price gets high enough, the pumper sells his shares, causing the stock to fall and leaving investors with poor returns, or even losses. Anyone here see The Wolf of Wall Street?"

Also avoid stocks with earnings so low that their price-to-earnings (P/E) ratio is very high (i.e., over 30x for the coming year).

Find good investing research. There are plenty of free websites such as Kiplinger that offer sound information to help guide your investment journey. Many sites such as Yahoo Finance, Morningstar and StockCharts allow folks to research potential investing opportunities.

Doing your proper research and coming up with a plan will allow you to improve your long-term investment returns with decent results. It will also allow you to weather difficult investing periods when the market takes a downturn.

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You may not realize it, but the IRS might be celebrating, too. That's because investors can end up paying more of their gains in taxes than they have to if they aren't smart about choosing which of their shares to sell based on a factor known as cost basis.

Rather than being solely about what you make, "investing is about what you keep," explains Nilay Gandhi, a certified financial planner with Vanguard Personal Advisor. "Choosing the right cost basis method helps you keep more money in your pocket."

In concept, cost basis is simple: It's the price you paid for an investment. It isn't a worry for transactions made in tax-protected accounts, such as IRAs. Money withdrawn from those accounts is typically taxed at ordinary income rates. Whenever you sell shares held in a taxable account, however, your cost basis determines the size of your gain or loss, as well as your capital gains tax liability. The process can get tricky if you have been steadily buying shares of the same companies or funds over time.

Because prices go up and down, you paid a different price each time you made a purchase. Each separate purchase of a security in a single transaction is called a tax lot. So when it comes time to sell some of your holdings, the size of your tax-reportable gain (or loss) will depend on which lots you sell.

If you sell lots purchased more than a year ago for a profit, you could pay anywhere from no tax to 20% in federal long-term capital gains tax, depending on your tax bracket. (You might owe more to your state if it taxes capital gains.)

Selling lots you purchased within the past year for a profit could incur short-term federal capital gains tax of up to 37%, as well as possible state tax. In addition, any gain, whether short term or long term, could boost your income enough to expose you to other taxes or costs – such as the federal net investment income tax of 3.8%. Losses, on the other hand, can be used to offset gains and reduce your tax bill.

Unless you change your brokerage's default settings, whenever you sell part of a holding, most major brokerages will typically either sell the oldest lots first or report your average overall cost to the IRS. That's an okay start, but most brokerages offer other options that can reduce your taxes even more, says Allan Roth, a Colorado-based certified public accountant and financial adviser.

Choose your cost basis options wisely

Roth's preferred method is to select which lots to sell himself so that he can exactly tailor his gains or losses to that year's tax situation. To do that, you must go into your brokerage's account settings and switch the cost basis default to the fully personalized option, which goes by slightly different names at different brokerages, such as "specified lots" at Charles Schwab, "specific shares" at Fidelity and "specific identification" at Vanguard.

Before any sale, decide exactly which lots will give you the optimal combination of gains and losses, and only then direct the brokerage to sell your chosen lots.

How cost basis is calculated

For investors who don't want to spend time on such precise machinations, brokerages offer several other automatic cost basis methods that advisers say can help reduce tax liabilities. To make sure you are taking advantage of the option that's best for you, log in to your brokerage account and check (and possibly change) your cost basis default setting before you make any sale, Roth stresses.

"The IRS doesn't allow do-overs," he says. There are more than a dozen cost basis methods. Here are five of the most popular and useful options, listed alphabetically:

Average. This method, which averages all your purchase prices of the same investment, is typically reserved for mutual funds. It's the default fund option at some major brokerages, including Fidelity and Vanguard. The IRS does not allow you to use it for most stock sales. The average method is one of the simpler methods and can be a reasonable option for longtime fund investors who expect their capital gains, income and tax rates to remain stable.

First In, First Out (FIFO). This method automatically sells the oldest lots first. It is the default option for all holdings on E*Trade, Robinhood and many other brokerages, and it is the default option for stocks and exchange-traded funds at Fidelity, Schwab and Vanguard.

In a generally rising market, FIFO makes it more likely that any capital gains will be long term. Josh Trubow, a certified financial planner in Waltham, Massachusetts, notes that this option doesn't guarantee the lowest tax bill, but it can be a reasonable choice for investors wishing to donate highly appreciated stock.

It can also work for investors whose income – after the gains are added – keeps them in a low capital gains bracket. For example, for 2024, married couples filing jointly who have taxable income below $94,050 pay no federal long-term capital gains taxes. It may also make sense to take gains now if you think your tax rate will be higher in the future, Trubow adds.

Highest In, First Out (HIFO). This strategy sells the lots that you paid the most for. That can be advantageous for anyone trying to limit their capital gains and maximize their tax losses, says Vanguard's Gandhi. But, he warns, this method does not take into account the date you made the purchase. If using this method results in selling for a profit some shares bought within the past 12 months, you could face higher short-term capital gains rates.

Lowest Cost, First Out (LOFO). This method sells the investments with the biggest gains first. Like HIFO, LOFO does not take into account the date of the purchase, so it may expose users to liabilities for short-term capital gains tax. And like FIFO, it can be a reasonable option for those designating appreciated shares to donate, or for those currently in low tax brackets or who expect their tax rates to be higher in future years.

Tax-optimized. Most major brokerages offer at least one sophisticated automatic cost basis option that takes into account both timing and returns to avoid short-term capital gains taxes and maximize tax losses. E*Trade calls its version "Minimum Tax Impact," Fidelity's version is "Tax-sensitive," Schwab's is called "Tax Lot Optimizer," and Vanguard's is "Minimum Tax."

Roth, who works with clients who use a few major platforms, says he hasn't noticed significant differences in the results of the different tax-optimized methods at the brokerages. Although he still prefers designing his cost bases himself, he says the brokerages' automatic tax-minimizing options are a good compromise.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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That idea isn’t wrong, but it’s also not entirely right. As with many things in the world of personal finance, it takes some digging under the surface to see why.

Monolithic diversification?

Over-reliance on mutual funds can lead to something I call the duplication trap. To understand what that means, consider the common scenario of a portfolio invested in more than one mutual fund.

Generally, when choosing a mutual fund, you look for the ones that perform the best. If you invest in 15 of the top-performing mutual funds, the logical assumption is that you’re well-diversified: Each mutual fund is itself diversified because it owns multiple assets. If one of the mutual funds makes unfortunate investment decisions and performs poorly, because you’re diversified in mutual funds themselves, the other 14 can help buffer the losses.

Making that assumption, however, risks a fall into a duplication trap. Consider why those 15 funds are the top-performing funds. Odds are, it’s because they’re all investing in largely the same assets! For example, if Mutual Fund 1 invests in Microsoft, Apple, Google and Nvidia, and so do Mutual Funds 2 through 15, then what you’ve done is invest in the same four tech companies 15 times. Suddenly, all that diversification doesn’t seem so diverse.

This is why it’s important to investigate what exactly the mutual fund you’re considering is invested in, especially if you already have other mutual funds in your portfolio. There’s no point in getting a second mutual fund that virtually mirrors the first — you might as well just increase your position in the first fund.

Unanticipated fees

I recently worked with a client who had about $1.3 million invested in mutual funds. She’d been working with a large financial services firm that charged fees for their services. What she failed to understand is her fees didn’t stop there. Each mutual fund has an expense ratio — a fee you pay for the management of the fund, separate from your adviser. She was paying considerably more than she realized in fees to hold multiple mutual funds that were all largely duplicates of one another.

This is a common hazard when working with very large financial services firms. When a firm scales up its operations to accommodate millions of clients, it must streamline. It’s impossible to individualize advice for every client, so the firm usually puts each client into a risk-tolerance category and then chooses funds for that category rather than the individuals in it.

This generally leads to a lack of diversity in your investment options, which can lead to paying excessive fees while tumbling headlong into the duplication trap.

Uncontrollable income

Another weakness of a mutual fund-heavy portfolio is most funds pass on the earnings (capital gains) to the fund holder, you. Each year, the investor must pay capital gains taxes on the distribution, regardless of whether you wanted it or not. You might ask, who wouldn’t want someone handing them cash in exchange for having to pay taxes? However, taxes aren’t the only issues these distributions can cause.

The client I mentioned above retired early, well before she was eligible for Medicare. When you do that, you need to find a way to cover your health care until you become eligible. This can be very expensive unless you qualify for reduced-cost plans through the Affordable Care Act. To qualify, your income needs to remain under certain limits depending on your household size.

If you’re heavily invested in mutual funds, all of which are sending you money each year, you may not be able to keep your income under those limits. Dividends for people with sizable stakes can be in the tens of thousands of dollars, forcing you to pay very high insurance premiums until you become eligible for Medicare at age 65.

This is a good example of why it’s important, as you near retirement, to consider how your investments might impact your finances in unexpected ways. Will they force you to pay too much for health care? Will they move you into a higher tax bracket? You need to be in control of how your retirement money gets distributed to avoid unpleasant surprises in health care spending or tax season.

In general, mutual funds are a solid choice for younger-to-middle-age investors who don’t yet have a financial adviser, especially if they’re part of your employer-sponsored 401(k) where a company match is available. As you approach retirement and start shopping for a financial professional, it’s a good idea to consider whether you should continue that strategy. Work with your adviser to determine the best investment strategy for your unique situation as you approach and enter retirement.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Three cuts in short-term interest rates helped fuel gains in the second half of the year. Trump's election victory kicked shares even higher, because it boosted investor expectations for tax cuts, deregulation and stimulative government spending, among other things, all of which are generally good for stocks.

As usual, large-company growth stocks turned in top returns this year, as artificial intelligence (AI) shares and the likes of Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), Meta Platforms (META) and Nvidia (NVDA) still drove market gains – despite a less-frothy year than in 2023. Technology stocks weren't the best sector of the year; communications services stocks, a category that includes Meta and Alphabet, fared even better.

Small and midsize U.S. stocks struggled to keep up. They turned in respectable, double-digit total returns but failed to beat large-company stocks. The Russell 2000, an index of small companies, returned 12%; the S&P MidCap 400 Index gained 14%.

Foreign stocks, however, appeared to be on their way to posting a breakout year – until they were hit by a late-summer rout that just wouldn't end. Over the first eight months of 2024, the MSCI EAFE Index, which tracks foreign stocks in developed countries, gained 12%. But anxiety about a slowdown in the U.S. (and softer growth in other parts of the rest of the world) in late summer sparked the sell-off in foreign shares; tariff fears weighed on certain international markets even more after the U.S. election. All told, the EAFE Index gained just 4% for the full calendar year.

Emerging market stocks fared better, climbing 7.5%. That's partly because China, which represents about one-third of the MSCI Emerging Markets Index, fared well, with a 19% gain. But Brazil and South Korea, two other big players in the benchmark, were down 30% and 23%, respectively.

How we compiled the Kiplinger mutual fund guide

Here, we show the top-performing stock mutual funds in 11 categories, using information from Morningstar, the financial data firm. In some cases,

Morningstar's classifications for certain funds may strike you as odd, and we've tried to correct or explain those instances as best we can. We only include funds with a minimum investment requirement of $10,000 or less; we cut funds that are only available to institutional investors, as well as funds that are only available to select advisory clients of specific investment management firms.

Most funds are available at major online brokers. Many charge an up-front sales fee, but in most cases you can purchase shares at a large online broker without paying a load or transaction fee.

A handful of funds on the list, however, are only available the old-fashioned way: directly from the fund company.

Finally, it's important to note that these lists are not meant to represent recommendations from Kiplinger. We present them to offer investors a tally of how certain broad categories of funds performed and to provide a starting point for you to perform your own research. All data is through December 31, unless otherwise noted. Funds marked with an asterisk are closed to new investors; those with a double asterisk are closed to all investors.

Large-cap stock mutual funds

Growth wins – again.

Fred Alger Management has been known for growth-stock investing for 60 years, and three Alger funds make the one-year winners list in this growth-led market. The funds share managers Patrick Kelly and Ankur Crawford; CEO Dan Chung comanages two of the three.

Usual suspects Microsoft (MSFT), Nvidia, Meta Platforms and Amazon.com top the funds' portfolios, but stock of software firm AppLovin (APP) really packed a punch, up 350% since it was added to the fund in April.

The Permanent Portfolio Aggressive Growth (PAGDX), with Nvidia and Palantir Technologies (PLTR) recently accounting for nearly 27% of assets, shone in 2023 and 2024, but it has landed in the bottom 25% of its subcategory (large-cap funds with a blend of growth and value traits) four times in the past eight years.

The Fidelity Blue Chip Growth (FBGRX), one of the Kiplinger 25, the list of our favorite no-load mutual funds, ranks more consistently in the top half of its peer group (large growth funds).

Mid-cap stock mutual funds

Landing a punch.

Kinetics Paradigm (WWNPX) and Kinetics Market Opportunities (KMKNX) make the top-10 lists in all four time periods, albeit with lofty expenses. Both funds hold an outsize stake (60%-plus) in Texas Pacific Land (TPL), one of the largest landowners in Texas, with extensive oil and gas royalties. The stock more than doubled in 2024 and has notched a 40% annualized gain over the past decade.

Ave Maria Value (AVEMX), on the three-year list, also counts Texas Pacific Land as a top holding. The fund screens out firms that support activities contrary to the core teachings of the Catholic Church. Two other funds that screen companies based on Christian views are One Rock (ONERX), on the one- and three-year winners lists, and Timothy Plan (TAAGX) on the five-year.

The T. Rowe Price Mid-Cap Value Fund (TRMCX), another three-year winner, has thrived since manager Vincent DeAugustino took the helm in mid 2022. The fund ranks in the top quartile of mid-cap value funds in each of the past three calendar years.

Small-cap mutual funds

Nice rally, but still trailing.

The Kinetics Small Cap Opportunities No Load Fund (KSCOX) tops the winners lists in all four time periods. Texas Pacific Land accounts for more than half the fund's $488 million portfolio. Comanaged by a long-tenured team, the fund comes with a pricey, 1.64% expense ratio.

Several other small-company funds (their official category despite a mid-cap tilt to some portfolios) are three-peat winners. Both of the Hennessy Cornerstone funds, Mid Cap 30 (HFMDX) and Growth (HFCGX), were all-in on industrials at last report, which accounted for more than 30% of assets – yet the only overlapping top-10 holding is Sprouts Farmers Market (SFM).

The Oberweis Micro-Cap (OBMCX) and Small-Cap Opportunities (OBSOX), five- and 10-year winners, seek to capitalize on market inefficiencies caused by a lag in investor response to new information. Micro-Cap ranks in the top 25% of small growth funds for six of the past 10 years; in the top half for seven. Opportunities makes the top half in five of 10 years.

Hybrid mutual funds

A mix of stocks and bonds.

Given the solid returns of both stocks and bonds in 2024, hybrid funds posted respectable returns last year.

Standouts include the target-date funds Fidelity Freedom Index 2065 (FFIJX), with a 90% stock portfolio, and Putnam Retirement Advantage 2065 (PCJZX), 95% stock.

Disciplined Growth Investors (DGIFX) lands in the three-, five- and 10-year tables. The moderately aggressive allocation fund holds 70% of its assets in stocks and 30% in bonds. Interested investors can buy shares directly from the fund company.

Kinetics Global (WWWEX) isn't your typical hybrid fund. Fund tracker Morningstar categorized it as a global small- and midsize-company stock fund for years before reclassifying it in 2022, presumably because of its sizable, 33% cash position. The rest of the fund holds stocks; Texas Pacific Land, which manages oil- and gas-rich property in West Texas, is a big holding. Focus your attention on other options if you seek a stock-bond mix.

Large-cap foreign stock mutual funds

An almost-good year.

Foreign developed markets rallied for much of 2024, only to give back a lot of their gains in the year's last quarter.

Pimco StocksPLUS International (USD-Hedged) (PIPAX) uses derivatives to track the dollar-hedged MSCI EAFE Index, but the fund enhances returns by running an actively managed bond portfolio alongside. The fund has outpaced its peers in nine of the past 11 calendar years. (Pimco A shares are available without a load or transaction fee at most online brokers.)

Marsico International Opportunities (MIOFX) has outpaced its peers in most calendar years over the past decade, too. But a big boost came from its 40% stake in U.S. stocks, including Nvidia, Spotify Technologies (SPOT) and Eli Lilly (LLY).

Some value-oriented funds made the grade: Carillon ClariVest International (EISAX) merits a mention. The fund's hefty fee is a negative, but the managers' focus on companies in the midst of an upswing in earnings growth has delivered impressive results.

Small- and mid-cap foreign stock mutual funds

Making the best of a blah market.

Smaller-company international stocks struggled, but these funds fared impressively well. Value-oriented fund Brandes International Small Cap Equity (BISAX) wins a spot on the one-, three-, five- and 10-year winners tables this year, but a year-by-year look shows performance tends to be less consistent than that record suggests. The fund charges a front-end load, but you can buy it load-free at E*Trade and Schwab.

Brown Capital Management International Small Company Fund (BCSVX), a member of the Kiplinger 25, is a one- and three-year winner. It favors small growth firms with a competitive advantage, a defensible position in their industry, durable revenue growth and able managers. Profitability – or a clear path to it – is a must, too.

Over three years, under new manager David Jenkins, Fidelity International Small Cap (FISMX) shines. So does the value-focused Oakmark International Small Cap (OAKEX), comanaged by mutual fund legend David Herro.

Global stock mutual funds

A world of opportunities.

Global funds invest all over the world, including the U.S., and are a one-stop option for investors seeking geographical diversification. But U.S. stocks have led foreign shares, so global funds with outsize stakes in American firms outpaced their peers; a focus on growth companies helped, too.

Fidelity Worldwide (FWWFX) holds 70% of its assets in U.S. stocks (the typical global stock fund holds 58%). Nvidia, Meta Platforms and Microsoft are top holdings.

Marsico Global (MGLBX) is a perennial winner, and it holds 62% of assets in U.S. shares. But unlike most global stock funds, it doesn't hold any emerging markets shares. Third Avenue Value (TVFVX), by contrast, holds only 21% of assets in U.S. stocks. The fund's hunt for value has taken it far afield from its early days as a U.S. value-oriented stock fund. Today, it focuses on small- to midsize-company foreign stocks, mostly in the U.K., Japan, Germany and Canada.

Diversified emerging market stock mutual funds

A good year – for a change.

China was less of a drag than in previous years. Stocks there climbed 19% in 2024, but markets in Brazil, Mexico and South Korea posted big losses, and the MSCI Emerging Markets Index gained just 7.5%.

Pzena Emerging Markets Value (PZVEX) focuses on deeply discounted shares, which can result in somewhat streaky returns as the managers wait for their investment thesis to play out. But investors in the fund over the past decade have been rewarded, relative to the returns of other emerging markets stock funds. Artisan Developing World (ARTYX) invests in 30 to 50 large, growing, financially sound firms that generate positive free cash flow (money left after investments and expenses to maintain and expand the business).

A word about the 10-year records of Matthews Emerging Markets Small Companies (MSMLX) and Fidelity Emerging Markets (FEMKX): Both funds sport newish managers who haven't been at the helm for the entire period.

Regional and single-country mutual funds

India, India, India.

India funds pepper every winner's table this year, beating out funds that focus on other areas – say, China, Japan or Europe.

Wasatch Emerging India (WAINX) holds 33 midsize- to large-company stocks, such as Bajaj Finance, a financial services firm, and Trent, a retail chain. Matthews Asia Innovators (MATFX) taps into fast-growing, innovative sectors in Asia outside of Japan. Its best-performing stocks over the past 12 months include Sea, a Singapore-based gaming and e-commerce concern, and Taiwan Semiconductor Manufacturing (TSM).

Japan's stock market hit an all-time high in 2024, and most strategists expect the good times to continue. Hennessy Japan Small Cap (HJPSX) allows investors to focus on the country's domestic growth. Its sibling, Hennessy Japan (HJPNX), is a winner over one year and 10 years. Though the fund delivered terrible returns in 2021 and 2022 compared with its peers, it seems to have regained its footing since.

Sector-specific mutual funds

Two words: tech and energy.

Technology and energy funds topped the returns for sector funds over the past one, three, five and 10 years. Holding shares in market leader Nvidia is a key reason tech funds make up four of 2024's top performers, as well as all of the winners for 10-year returns. The chip designer gained 171% in 2024 and an annualized 74.9% over the past decade.

Fund beneficiaries include Fidelity Select Semiconductor (FSELX) and the more broadly diversified Fidelity Select Technology (FSPTX). Energy-focused funds make up half of 2024's top 10 and all of the three-year winners.

Kinetics Spin-Off and Corporate Restructuring (LSHEX), despite a lofty 1.58% expense ratio, made the top-10 lists for one, three and five years. It has a 69% stake in Texas Pacific Land, a favorite in several Kinetics funds and a recent addition to the S&P 500 Index. The owner of oil and gas royalties and land gained 114% in 2024.

Alternative mutual funds

A hodgepodge of market hedges.

These funds offer investors ways to diversify beyond stocks and bonds. They employ a variety of strategies that make bets on commodity prices, currencies and futures, among other things. Bitcoin funds topped the one-year winners after the price of the digital currency topped $100,000 in late 2024.

Otter Creek Long/Short Opportunity (OTTRX) managers buy stocks they believe are undervalued and sell short stocks that are overvalued. Recent reports show the managers were bullish on Meta Platforms and bearish on Lowe's (LOW).

AQR Event Market Neutral (QMNNX) employs a similar strategy; it recently held shares in 3M (MMM) and Wendy's (WEN) and sold short stakes in Monster Beverage (MNST) and Alphabet.

Driehaus Event Driven (DEVDX) likes to invest in companies with a catalyst expected to drive results over the next 12 months, such as a merger, refinancing or reorganization. Top holding Cannae Holdings (CNNE), for instance, recently purchased a majority stake in the Watkins Company, a maker of spices and seasonings.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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To establish a foundation, it’s essential to understand that a mutual fund, at its core, is a “wrapper,” or an investment structure that allows many individual investors to pool their money to invest in a basket of securities. Instead of buying many individual securities on their own, investors invest in shares of a mutual fund to gain exposure to these securities with one purchase. Buying shares of a mutual fund allows for easier diversification among many securities.

Now, let’s dig into the three most common misconceptions about mutual funds.

Misconception #1: Mutual funds give investors the opportunity to beat the market.

I can see where this misconception originated since active investment managers predominantly used mutual funds. The mutual fund structure dates back nearly 100 years in the U.S., gaining popularity in the 1970s and 1980s. Historically, mutual funds were investment vehicles accessing active investment strategies where professionals running the funds attempted to beat the market they were compared to.

In the 1970s, the first passive investment S&P 500 index fund was made available to retail investors. It was designed to track the market, not beat it. As the popularity of index investing grew, more passively managed mutual funds came to market.

If you participate in a 401(k) or 403(b) plan through your employer, odds are you are given a list of mutual funds to choose from, and there are likely passively managed/index options available to keep plan expenses low. A mutual fund is just a structure to pool investors, and it is critical to understand the stated investment strategy, the underlying investments and the cost of the funds you are considering, which vary per fund.

Misconception #2: Mutual funds have high expenses.

Many legacy funds have high expenses, including manager fees and commissions, which have dominated this investment vehicle for decades. However, many mutual funds today have low expenses. Over the mutual fund’s long history, commissions and fees were relatively high by today’s standards. Further, most actively managed funds failed to beat their benchmarks’ net of fees, leading to investors looking for other options. The mutual fund wrapper became confused with the cost of the active management of many funds.

A lot has evolved in this structure over the past few decades. Fees have been driven down, and a lot of low-cost passive index replication strategies have been offered in the market using this vehicle.

Mutual funds are available in all types of asset classes ranging from stocks, bonds, commodities, real estate and money market. There are mutual funds that blend stocks and bonds for certain levels of risk appetite and many that give investors access to liquid alternative investment strategies. The expense level will be driven by how the mutual fund is managed and what type of assets it invests in. For example, a U.S. stock mutual fund will likely have different costs than a mutual fund investing in commodities.

Investors should also pay attention to the share classes of a specific mutual fund. In many cases, a fund may have multiple share classes with different expense levels. Investment minimums may apply to getting access to the lowest-cost share classes. One of the largest passive index mutual funds operates with a 0.04% annualized fee, which is an example of not all mutual funds having high expenses.

Misconception #3: Buying mutual funds is an investment strategy.

In many cases, investors will use multiple mutual funds to design a well-diversified portfolio to meet their needs. They may also use mutual funds to access a specific asset class on part of their portfolio and different types of investment vehicles for other parts of the overall strategy. For example, a mutual fund that is managed to passively track the S&P 500 index will invest only in large U.S. publicly traded stocks. That might suit certain investors who are comfortable with their entire investment portfolio moving up and down with that particular index.

However, investors who may not need to or be able to tolerate that level of price volatility may end up adding other investment strategies to their portfolio to balance out their stock exposure. They may end up adding an investment allocation to mutual funds that invest in bonds or owning the bonds directly if that is better for the specific investor.

While we discussed three common misconceptions about mutual funds, some of this also applies to a more modern pooled structure called exchange-traded funds (ETFs). These, too, can come with different types of investment strategies and a range of costs. However, investors have different misconceptions about ETFs; many believe they are all low-cost and better than mutual funds.

In some respects, ETFs come with more advantages than mutual funds. For example, being able to trade them throughout the day, certain asset classes are more tax efficient in this wrapper than in a mutual fund, and it is possible to see all the underlying holdings daily. While this is not an exhaustive list, the main point is you must still research what each invests in and how it manages the strategy.

Not all mutual funds are expensive, and not all ETFs are cheap. Remember, these are just pooled vehicles that allow investors access to a basket of securities with one purchase vs buying all individual securities on their own. A financial adviser can help you navigate these types of investments and determine a strategy for your goals and risk tolerance.

Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Keep in mind this article is not meant as personal financial advice. Retirees should work with financial professionals and do their own research to make suitable investment choices based on their own needs and goals. Kiplinger simply wants to provide an overview of what are generally considered the best conservative investments for retirees.

Moreover, as retirees get older, they should take stock of what is and what isn't working and potentially narrow their investment choices over time such that simplicity and liquidity become the highest priority.

Overall, some of the safest investments for retirees tend to be a mix of mutual funds, preferably index funds, that invest in the stock and bond markets, as well as liquid money market funds (i.e., those that pay interest).

How to choose the best conservative retirement investments

Warren Buffett is famously quoted as saying that retirees should invest the majority of their assets in low-cost ETFs (exchange-traded funds) that mimic the S&P 500. In other words, they use an indexing strategy that mirrors the performance of the 503 stocks that are included in the index.

Buffett is quoted as saying that up to 90% of investors' assets should be in these cheap ETFs. In his 2013 letter to Berkshire Hathaway shareholders, he wrote that the "long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers." 

Others believe that a more appropriate mix is 70% in stock market index funds. The remainder should be in a mix of bond funds, certificates of deposit (CDs) and money market funds. That could mean 20% in bond funds and 10% in CDs and money market funds.

Here are some of the benefits to these types of conservative retirement investments:

Stock market index ETFs have low fees and also pay out all the dividends they collect from the underlying equities. There are no capital gains taxes incurred until shares are sold.

Right now, the S&P 500 has a dividend yield of 1.4%. Moreover, the S&P 500's 12-month total return (price change plus dividends) is 23%. 

Additionally, investments in stock index funds have played out well over time. For example, the S&P 500 has averaged an annual total return of 15% over the past 15 years. Not too shabby.

Bond funds typically offer investors a lower return than index funds, but more peace of mind. Granted, the bond market has seen its fair share of volatility in recent years, but as Kiplinger contributor Jeff Reeves writes in his feature on the best bond funds to buy, "If you're at or near retirement and your biggest concerns are capital preservation and income, you simply cannot overlook bonds."

Investors can also gain exposure to the fixed-income market through bond ETFs, as well, which tend to have lower expense ratios than their mutual fund counterparts.

Keep in mind that bond funds fluctuate in price, just as stock funds do. Many investors don't realize, for example, that if interest rates rise over time, bond prices can decline. However, because of the inverse relationship with bond prices and yields, falling prices result in higher yields. 

On the other hand, if the general level of rates begins to decline, principal amounts will rise but investors could be left with lower monthly interest payments.

Certificates of deposit (CDs) are another way to safely grow your money in retirement, although one drawback includes having to tie up your money for the length of the certificate. Still, many CDs currently have yields that range well over 5%. For example, Bankrate reports that some of the best CD rates right now range between 5% and 6%.

Similarly, high interest is available from a mix of money market mutual funds. According to Crane Data, the 100 largest taxable money market funds tracked by the investment services firm currently boast an average yield of 5.15%. 

The bottom line 

The bottom line is that folks looking for the best conservative retirement investments will generally make steady returns in index funds that cover the stock and bond markets. The theory here is simple: As funds are drawn down for retirees' liquidity needs, the growth from being invested in the stock market and to some extent bond funds, can help counteract these drawdowns.

In addition, by keeping a portion of investments in semi-liquid and stable CDs and liquid money market funds, both which pay interest, retirees can meet their monthly and daily funding needs. Over time, the portion in liquid funds should grow for most retirees.

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A brokerage sweep account, sometimes called a core or settlement account, holds your uninvested cash. When you sell a security – a stock, mutual fund or exchange-traded fund, say – the proceeds are placed in the sweep account. And when you buy a security, cash in the account pays for the trade. It all happens automatically. 

But here's the rub: Some brokerage firms park your cash in accounts with good yields, while others put it in holding places with not-so-good yields. 

At Fidelity, for instance, cash in retail brokerage and retirement accounts sits in a money market mutual fund that yields a healthy 5.0%. Vanguard's default settlement account, a government money market fund, yields 5.3%. By contrast, Charles Schwab offers a choice of two sweep accounts. Both yield 0.45%. And E*Trade offers little choice – most customers land in a bank deposit program that currently yields 0.01% for balances of $499,999 or less. (All yields and data are through November 30, unless otherwise noted.)

Of course, sweep accounts are supposed to be temporary holding places, not cash management accounts. You can't write checks or pay bills from a sweep account, for example. "It's a settlement account, for the liquid cash you have at your brokerage," says Greg McBride, Bankrate.com's chief financial analyst. 

If your brokerage firm offers a government money market fund as its default sweep account, you probably don't need to worry about your settlement account yield or make a change. But if your brokerage account cash isn't earning 4% or better, it may pay to consider alternatives. 

Finding the right place for your idle cash isn't just about getting the best yield, however, says Peter Crane, president of money-fund-tracker Crane Data. Other factors matter too, such as how soon you plan to use your cash and how much of it you have. Keep these tips in mind before you move your money out of a sweep account. 

Know your options when it comes to sweep accounts 

Some firms let you choose a different default sweep account – a bank account, say, or a government-debt or muni-bond money market mutual fund. If your firm doesn't (and you don't like its default option), you'll have to move cash on your own to a competitive money market fund. 

Schwab guides investors who want to boost their cash yield to money market funds, including money funds that hold government debt or municipal bonds. The taxable money fund yields range from 5.06% to 5.25%, and they have no transaction fees or investment minimums. But you don't get instant access – the money will be available in your sweep account the next day if you sell shares in the money fund by 4 pm Eastern time.

Vanguard offers as a second option a bank sweep account called Vanguard Cash Deposit, which yields 3.7% as of August 31. But Jeffrey DeMaso, editor of The Independent Vanguard Adviser, a newsletter about Vanguard funds, favors the default government money fund over the cash deposit account, in part because the money fund offers a higher yield. 

Make sure your money is accessible 

Where you hold your money matters, depending on how you plan to use it. "Convenience is the most important factor," says Crane. Funds you want to put to work immediately in the event the stock market takes a dip are best held at the ready in your brokerage account, even if that's in a low-yielding sweep account. Otherwise, "you could miss a buying opportunity of a lifetime," says Crane. 

The caveat is how much money you're sitting on and how long you plan to hold it. If it's $100,000, $20,000 or even $10,000, a 5.0% yield over one year can be meaningful ($500 to $5,000). Unless you're planning to invest the whole pot in short order, it may be worthwhile to shift some of the cash to a higher-yielding money fund. 

Don't overthink money market funds  

The vast majority of money market funds invest in short-term government debt, says Crane, and "it really doesn't matter which one you pick." The two biggest are the Fidelity Government Money Market Fund (symbol SPAXX, expense ratio 0.42%, seven-day yield 5.0%) and the Vanguard Federal Money Market Fund (VMFXX, 0.11%, 5.3%). 

There's no minimum on the Fidelity fund. But the Vanguard fund requires a $3,000 initial investment – unless you're a Vanguard brokerage account customer, in which case there's no minimum. Just remember that if you invest in a money market fund outside of your sweep account, transfers may not be instantaneous. 

Don't obsess about yields in the same ballpark 

People tend to dither over choosing a fund with a 5.25% yield or one at 5.00%, says Crane. That's annualized. You'd have to leave the cash for 12 months to earn the full yield, and even if you do, the difference in earnings may not amount to much. Over the course of a year, for instance, you'd earn $1,050 on a $20,000 balance at 5.25% and $1,000 at 5.00%. 

That said, money market funds with yields that seem too high are a red flag. The Federal Reserve has set its short-term interest rate target between 5.25% and 5.50%. If a money market fund yields 6%, says Crane, "You have to ask yourself why. The fund may be taking on some added risk." 

All yields are net of fees and are annualized. Money market funds quote seven-day yields, and bank-issued money market deposit accounts and savings accounts cite annual percentage yield (APY), which includes the effect of compounding interest. They're calculated differently, so these yields "aren't necessarily apples to apples, but they're comparable," says Bankrate's McBride. "They're both projections on how much you'll earn over the course of the coming year." 

Skip municipal-bond-based money market funds 

Municipal debt generates income that is exempt from federal, and sometimes state, income taxes. But unless you're in the highest tax bracket, or you live in a high-tax state such as California or New York, "ignore them," says Crane. 

For starters, the yields on municipal-bond money funds tend to bounce around a lot. And the tax-equivalent yields on these funds aren't as enticing unless you're a very high earner. For instance, the 3.38% yield on the Vanguard Municipal Money Market Fund (VMSXX), the biggest retail fund, translates to a tax-equivalent yield of 4.44% for investors in the 24% federal tax bracket. But the tax-equivalent yield for those in the 35% bracket, including the extra 3.8% Medicare surtax on investment income that applies to certain high income earners, jumps to 5.52%. 

Consider Treasury bills for cash you won't invest right away  

These U.S. Treasury IOUs have maturities of less than one year (they're issued in four-week, eight-week, 13-week, 17-week, 26-week and 52-week maturities). Recently, one- to three-month bills yielded nearly 5.5% or more; four-month and six-month bills, roughly 5.4%. 

"This flexibility allows investors to potentially earn a higher return on their savings and still have access to their funds when needed," says Jonathan Bird, a certified financial planner in Phoenix, Arizona. 

You can buy them through your broker, typically for a minimum of $1,000. Or consider a T-bill exchange-traded fund, such as the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, 0.14%, 5.3%) or the iShares 0-3 Month Treasury Bond ETF (SGOV, 0.07%, 5.2%).

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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"It's a big moment going from earning an income to not earning an income. There's a lot of emotion and change," says Jeffrey DeMaso, editor of The Independent Vanguard Adviser, a newsletter for Vanguard fund investors.

Re-engineering your portfolio from accumulation mode to decumulation mode can be daunting.

You'll have to get a handle on how much you need for essential expenses and come up with a plan on how to cover these costs for the rest of your life.

"The biggest fear people have about retirement is running out of money," says Anne Ackerley, senior adviser of BlackRock's Retirement Group.

Fortunately, a variety of products and services – some new, others new-ish – are designed to help people spend and invest their savings wisely in retirement.

Some are available only in certain workplace retirement savings plans, so access depends on whether it's offered in your plan. Other funds or services are available to all individual investors. We'll walk you through some of the options.

All data and returns are through June 3, unless otherwise noted.

Look for retirement income strategies in your 401(k)

The first place to look for help is your workplace retirement plan. The SECURE Act, a broad package of changes to rules governing retirement and retirement savings plans, eased the way for corporate retirement plans to include annuities, which are insurance products that pay fixed annual sums, typically for life.

In response, some 401(k) plans are beginning to offer target-date strategies with an annuity component that offers a paycheck-like experience in retirement.

Like their conventional target-date-fund predecessors, target-date-plus-annuity strategies invest in multiple asset classes that shift over time to a more conservative mix as you age.

The twist is that at a certain point along that glide path, some of your contributions are directed to an annuity. BlackRock's LifePath Paycheck and Nuveen's Lifecycle Income series are two examples. Both are available in some retirement plans.

How does the annuity portion work?

The way the annuity portion works varies.

Nuveen's funds invest a portion of the bond portfolio in an annuity at the start of the series' glide path, 45 years before retirement. The annuity allocation starts at 2.5% of the portfolio and increases to 40% at the end of the glide path.

Allocations to the annuity contract included in BlackRock's LifePath Paycheck series, by contrast, start when investors hit age 55. The annuity makes up 8% of the overall portfolio to start and climbs to 30% over the next 10 years. In both series, the annuities have the risk-and-return profile of a broad-market bond fund.

Both the BlackRock LifePath Paycheck and the Nuveen Lifecycle Income series allow investors to choose when to turn on the income. At what age those payments can begin, however, depends on the strategy.

Investors can also choose not to turn on the income feature if they don't want or need it.

Plus, the annuities are institutionally priced (read: less expensive). There's no transaction fee or sales charge related to the annuity part of the target-date strategies, though there is a fee that the insurance company pockets. According to Nuveen, it is reflected in the annuity payout.

Expect more retirement funds with annuities to appear in workplace retirement plans. "Within 10 years, target-date funds with income are going to be the main thing in retirement plans," says BlackRock's Ackerley.

Not all retirement income strategies in 401(k) plans are tied to annuities. The Fidelity Managed Retirement target-date funds employ a cash-withdrawal strategy that starts at 4% of assets and gradually increases over time as you age. Choose the fund that aligns closest to the year you turn 70.

Experts set the glide path and do the ongoing asset allocation for these 401(k) offerings, as well as create a payout schedule for you.

"The idea is to provide stable payments and still have a remaining balance," says Sarah O'Toole, an institutional portfolio manager at Fidelity.

T. Rowe Price has a 401(k) plan offering called Retirement Income 2020 that aims to deliver a payout of 4% to 5% each year in monthly distributions, but it depends on the fund's return. There are only two vintages so far: 2020 and the recently launched 2025.

"When the portfolio does well, the payout goes up. When it doesn't, the payout goes down a bit," says fund co-manager Andrew Jacobs van Merlen. These strategies are also available to retail investors as mutual funds (more on them later).

Retirement income funds for everyone 

If your 401(k) plan doesn't offer retirement income funds like the ones we just mentioned, or a defined-contribution plan isn't available to you, you have a handful of mutual funds and financial services to consider.

Unfortunately, none feature the guaranteed income of an annuity.

We should note that retirement income funds aren't a new idea. Several firms, including Fidelity and Vanguard, launched managed-payout funds in 2007 and 2008 that promised to provide a steady income stream.

The timing was terrible (around the arrival of the Global Financial Crisis). The funds didn't catch on.

That said, the stars are aligning for retirement income funds today: More retirees are looking for help managing income, interest rates are higher, and the stock market is recovering.

We don't expect you to put all your eggs in one basket – or one fund – to create a workable retirement income strategy. In most cases, retirees should consider generating cash flow from multiple strategies and sources.

"You'll need an array of tools and products," says T. Rowe Price's Jacobs van Merlen, taking into consideration the risks you're willing to take, how long you'll live, and how much you've already saved, among other things. Bear that in mind as you peruse the following options.

The aforementioned T. Rowe Price Retirement Income 2020 (symbol TRLAX, expense ratio 0.51%) is available as a mutual fund to individual investors.

A 2025 version launched last year and trades under the ticker symbol TRRHX with a slightly higher expense ratio of 0.54%. The minimum investment for either fund is $25,000.

The managers aim to generate a 4% to 5% payout of the fund's average net asset value over the past five years, but the monthly distribution will vary from year to year depending on the fund's performance.

For its first five years, the Income 2025 fund will use the average net asset value of T. Rowe Price's standard Retirement 2025 target-date fund to calculate the payout rate.

The goal is to "live off the income of the portfolio without dipping into the principal," says van Merlen, though there's no guarantee on that front. So far, the 2020 fund's annualized return since inception in mid-2017 is 6.6%, which falls slightly above the fund's annual target payout.

At last report, Retirement Income 2020 held roughly 50% in stocks and 50% in bonds, cash and other assets. The underlying funds include some of the firm's longtime winners, such as T. Rowe Price Growth Stock, Value and Mid-Cap Growth.

Schwab Monthly Income funds – there are three – launched in March 2008 and have been tweaked over time. Their main objective is to provide a monthly income stream, although payouts can vary from year to year, and even from month to month.

Conservative investors who want to preserve principal should opt for the repetitively named Schwab Monthly Income Income Payout (SWLRX, 0.16%), which holds 30% in stocks and 70% in bonds.

Monthly payouts are limited to interest and dividend payments from the portfolio's underlying funds. In a normal interest rate environment, investors might get an annual payout rate of 3% to 5%; they'd get less in low-rate environments.

Over the 12-month period ending in May, the fund's payout rate was 4.89%. But in low-rate environments, the payout rate was lower (for the calendar year 2022, it was 2.42%).

Moderate-risk investors can choose between the Schwab Monthly Income Target Payout (SWJRX, 0.19%) and the Schwab Monthly Income Flexible Payout (SWKRX, 0.19%). Both hold exchange-traded funds, with 50% of assets in stock funds and 50% in bond funds.

Target Payout aims for a steady annual payout of roughly 5%, though it could be higher or lower. The fund's payout rate was 3.08% in 2022, and for the 12-month period through May it was 4.97%.

Flexible Payout is designed for investors who can deal with more flexibility in their income stream.

The fund aims for an annual payout between 4% and 6%, depending on fund performance and the market environment.

In the tough stock and bond market of 2022, the fund paid out 2.96%. But for the year ending in May, the fund's payout rate was 4.65%. Payments from both funds may include some return of capital.

The catch with these funds is that overall returns have been ho-hum. That may be an acceptable trade-off for investors who want a monthly income stream, but in lean years, you will probably get more capital returned to make that happen.

Over the past five years, Flexible Payout's annualized 3.0% return lags 94% of its peers (moderately conservative allocation funds). Income Payout's five-year return, 4.2%, lags 74% of its peers (conservative allocation funds).

A trio of American Funds Retirement Income Portfolios are worth a look for investors who are less dependent on a regular check and seek a little more capital appreciation.

These funds make quarterly distributions and have no payout target because they're designed to be a resource for discretionary spending, not necessary expenses.

But the experts behind the funds suggest ranges for annual withdrawal rates for each portfolio. In rough markets, for instance, investors should consider lowering their withdrawal rates.

Investors in the series' most conservative portfolio, American Funds Retirement Income Portfolio – Conservative (FAFWX, 0.65%, yield 3.1%), might consider a suggested annual withdrawal rate of 2.75% to 3.50% of their assets in the fund. The portfolio holds almost 40% in stocks and 60% in bonds and cash.

The ideal withdrawal rate for the moderate fund, American Funds Retirement Income Portfolio – Moderate (FBFWX, 0.66%, 2.9%), which holds roughly 50% in stocks and 50% in bonds, ranges between 3.00% and 3.75%.

And the most aggressive strategy, the American Funds Retirement Income Portfolio – Enhanced (FCFWX, 0.69%, 2.6%), which holds 60% in stocks, has a suggested withdrawal range of 3.25% to 4.00%.

These portfolios, which hold some of American's best mutual funds, including American Balanced, have annualized returns over the past five years that are middling at best.

But they have experienced below-average risk relative to peer funds. In 2022, when stocks fell 18% and bonds declined 13%, the Conservative and Moderate funds both lost 10.1%; Enhanced lost 11.1%. Those returns ranked among the top 20% of their peers or better.

Finally, investors interested in a digital advisory service might consider Schwab Intelligent Portfolios. The service helps retirees generate a check from their investment portfolio through a feature called Intelligent Income.

Based on the sum of money you invest with the robo service, Intelligent Income helps you figure out how much you need to withdraw and how to invest to stay on track, and it lets you set up automatic checks from your account, paid monthly, quarterly or once a year.

You can stop, start or adjust the payout at any time, says Kristina Turczyn, head of digital advice and wealth solutions at Charles Schwab. "We wanted to offer an easy way to automate the process and generate a paycheck from your own investment portfolio."

There's no advisory fee for Intelligent Portfolios and no additional fee for Intelligent Income.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance, but has since been updated. Subscribe to help you make more money and keep more of the money you make here.

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Most financial metrics are too complex to be done in your head. You'd likely need financial calculator or a spreadsheet to calculate the internal rate of return, yield to maturity, or common risk metrics like beta or standard deviation.

The beauty of the Rule of 72 is that it can be calculated by the average 10-year-old.

Let's take a look at what the Rule of 72 is, how it works and how it can be used in investing and financial planning.

What is the Rule of 72 in simple terms?

The Rule of 72 is a straightforward formula that provides a quick-and-dirty approximation of how long it will take for an investment to double in value assuming a fixed annual rate of return.

It's a solid tool for estimating the effects of compound interest and can be used to gauge the potential growth of your investments over time.

The formula for the Rule of 72 is incredibly simple. You divide 72 by the annual rate of return you expect to earn on that investment.

For example, if you expect an annual return of 9%, it would take approximately eight years for your investment to double (72 divided by nine equals eight).

What are specific examples of the Rule of 72?

Getting more concrete, let's say you own an S&P 500 index fund and you want to map out a few scenarios. If the index rises at its historical average of around 10%, you'd double your money in about 7.2 years (72/10 = 7.2).

If you believed that the S&P 500 is more likely to return, say, 15% due to strong earnings or continued tailwinds from the best AI stocks, you'd double your money in 4.8 years (72/15 = 4.8).

And if you believed the S&P would return a more mundane 5% due to, say, a recession, you'd double your money in 14.4 years (72/5 = 14.4).

In 2024, the S&P 500 generated a total return (price change plus dividends) of 25%. The Rule of 72 would suggest your investment in the S&P 500 fund would double at that rate in 2.9 years.

But that's assuming that rate of return stays constant. At last check, the S&P 500 was up nearly 14% with a little more than a quarter to go in 2025.

The Rule of 72 can also be used to assess the impact of inflation on your purchasing power.

If you want to determine how long it will take for the purchasing power of your money to be cut in half due to price pressures, you can use the same formula.

Let's say the inflation rate is 3%. You could divide 72 by three to get 24 years. Assuming a 3% rate of inflation, your purchasing power would be cut in half in 24 years.

The most recent Consumer Price Index report put headline inflation at 2.8% on an annual basis.

Using the Rule of 72 at that rate, your purchasing power would be cut in half in 25.7 years. But, again, that's assuming the inflation rate stays the same.

Why should I use the Rule of 72?

The benefits of the Rule of 72 are obvious. It's a simple formula that anyone with elementary school math skills can calculate. It doesn't require a Wharton MBA or CFA Charter.

It also allows you to set realistic expectations for your investments and can help you determine whether your financial goals are achievable within your investment time frame.

You can also use the Rule of 72 to compare different investment options. For instance, if you're deciding between a stock fund and a bond fund with two very different expected returns, the Rule of 72 can help you assess which one gets you to your financial goal faster.

Remember though, the Rule of 72 is designed to be a rough estimate and its assumptions aren't always realistic. It assumes a constant rate of return, and stock returns are anything but constant.

The average return is far from indicative of the return you're likely to get in any given year. It also doesn't account for taxes, fees or other expenses that can chip away at your returns.

And, like all financial models, it's only as good as its inputs: garbage in, garbage out.

While by no means a comprehensive analysis, the Rule of 72 is a useful tool that provides a quick and easy way to estimate the time it takes for an investment to potentially double.

It's valuable in financial planning and in comparing investment alternatives. And it's something even someone new to investing can put to work.

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But as the old saying goes, past performance is no guarantee of future returns. It's important to take stock of the current economic environment as well as your personal risk tolerance before plowing your hard-earned cash into what's popular.

The good news is that there are plenty of smart ways to invest your money this year. In fact, for most investors with a modest amount of cash, it's easier than ever before to put just a few hundred dollars to work and improve your personal finances significantly.

Smart ways to invest your money: CDs

With the recent increase in interest rates, it's easier than ever before to tap into safe returns that are nearly guaranteed. One of the most rock-solid options out there is a CD, or certificate of deposit. CDs are similar to high-yield savings accounts – these vehicles are basically just bank accounts where you get a fixed rate of return – only can't withdraw your money before a deadline without penalty. 

"For disciplined consumers, CDs can be a great way to set aside money while earning higher interest rates on their balances," writes Kiplinger contributor Seychelle Thomas in her feature on whether or not CDs make a good investment. "However, it's critical to have a readily accessible form of savings even if the rates aren't as high compared to a CD." 

If you don't need your cash immediately, a 1-year CD can offer as much as a 5.5% return right now. Rates, minimum deposits and durations may vary, so make sure to shop around for the best option that fits for you.

Smart ways to invest your money: Bond funds

If you want more "liquid" interest-bearing assets that are low-risk, bonds are a good option. Bonds are investment vehicles where investors give some cash to governments or corporations in exchange for repayment plus interest. Think of it as you, the investor, acting as the bank, and getting paid for the service of loaning out your money.

Rather than do the research for individual bonds, many investors prefer bond funds – which can include both traditional mutual funds or bond ETFs (exchange-traded funds). Both of these options are baskets of hundreds or even thousands of bonds, offering built-in diversification and a structured way to invest your money on Monday but get it back out on Tuesday if you really need it.

The largest bond fund at present is the Vanguard Total Bond Market ETF (BND), with more than $300 billion in total net assets. As the name implies, it holds a wide array of bonds from corporate debt to U.S. Treasury bonds to mortgage-backed securities. 

There are other more tactical options, but with almost 11,000 individual bonds in BND, you get easy access to the totality of this marketplace in a single holding. Right now, this Vanguard bond fund yields 4.3% – meaning the investment offers a slightly smaller rate of return than CDs, but more flexibility.

BND also trades as a mutual fund, the Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX). It requires a $3,000 initial investment.

Smart ways to invest your money for growth: Stocks

If CDs are all but guaranteed to give you your principal investment back, and bonds offer low volatility but more liquidity, stocks round out the list of smart ways to invest your money with a more aggressive but also potentially more profitable option to invest your money.

Stocks are investment stakes in publicly traded companies. And unlike the prior two options, stocks don't deliver a fixed rate of return. Instead, they generally deliver profits by appreciating in value based on those companies achieving better results.

The big success story many folks talk about is Tesla (TSLA). If you invested just $1,000 in its stock on the first day it traded back in 2010, you would have about $140,000 today! Of course, predicting future performance is easier said than done. There are plenty of horror stories, too. Some companies ultimately do go bankrupt and investors lose everything.

So, as with bonds, the safer route is typically to invest in a diversified basket of stocks via an ETF or mutual fund. The largest and most popular vehicle out there is the SPDR S&P 500 ETF Trust (SPY) with almost $500 billion in assets. Tied to the popular S&P index of the 500 largest U.S. stocks that includes Apple (AAPL) and other popular names, this S&P 500 ETF gives you exposure to the biggest companies on Wall Street in one holding that's easy to buy and sell.

Just remember that stocks are much riskier than bonds or CDs. So make sure you assess your own goals and risk tolerance before investing in SPY or any other stock market investment.

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The Vanguard International Dividend Growth (VIDGX) launched in November. It's run by the same Wellington Management team that's behind Vanguard Dividend Growth (VDIGX), the longtime standout U.S. stock fund, and the two mutual funds share the same investment philosophy and approach. The new fund is designed, in fact, to be paired with the U.S.-focused Dividend Growth fund.

Homing in on dividend growth is a way to find superior businesses, says manager Peter Fisher, who as of the end of 2023 heads both Dividend Growth and International Dividend Growth. "Companies committed to paying and raising a dividend are disciplined about how they allocate capital," he says. "They tend to be less risky and less cyclical businesses, and they have clean balance sheets." The end result is a portfolio of high-quality companies that tends to do relatively well when markets are weak. 

Fisher is not a new hand at foreign stock investing or dividend growth stock investing. He has been working with Wellington's dividend growth strategy team since 2012. And he has run a global dividend growth strategy since 2016, as well as an international dividend growth strategy since 2019, geared for both wealthy clients and institutional clients. 

The fund, which charges a 0.54% expense ratio, is too new to talk about many specifics, including performance. But Fisher says the portfolio will hold about 40 stocks in well-known, multinational companies based in Europe, Japan, Hong Kong and Canada. 

He expects the fund to yield roughly 3% and that companies in the portfolio will boast annual dividend increases of 10%, on average. 

And there will be little turnover of names in the portfolio. "We're buying to own for the life of the fund," says Fisher. "We want to find businesses that we can be partners with and owners of for the long term." We'll be watching it carefully for now, until it has a longer track record. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The need for vigilance is greater — and the stakes higher — when you’re shopping for mutual funds. Fund firms have a dizzying array of share classes for their funds. If you find a fund you like, you may have to decide which of its varieties is right for you. Different companies offer different options, but the share classes you might see include A, ADV, B, C, F, I, J, K, L, M, N, R, S, T, V, W, Y and Z. 

Some classes and names are simply marketing ploys. Jensen Investment Management named its retail investor class “J” to reinforce the company’s name. Vanguard’s “Admiral” class is a nod to the HMS Vanguard, the British ship that inspired the firm’s name. And Karner Blue Capital named its only fund class “Butterfly” for the endangered Karner blue butterfly.

Indeed, there is no standard for naming fund share classes. The labels can have different meanings from fund to fund. “Deciphering mutual fund share classes can be a time-consuming and overwhelming process for retail investors,” says Matthew Garasic, a fee-only financial adviser in Pittsburgh. 

Fund share classes, in addition to having different rules about who can purchase them and varying minimum initial investments, usually charge different expense ratios. In some cases you could pay a separate sales charge, too. Those costs can add up. “The share class an investor chooses can have a long-term impact on wealth accumulation,” says Garasic. 

To help you figure out which share class of any given mutual fund is right for you, we’ll break down common share classes and offer some guidelines to keep in mind as you shop for funds.

Why there are different share classes

The main reason mutual fund companies create share classes is to pay the assorted middlemen that sell their funds, such as financial advisers, insurance companies, brokerage platforms and 401(k) plans, among others, says Eric Jacobson, a director of the research firm Morningstar. 

The compensation for these intermediaries often comes out of the funds’ fees, hence the different share classes and their wide-ranging expense ratios. “It is all driven by dollars,” says Jacobson. The dividing lines between share classes boil down to three factors:

1. Sales charges: In mutual fund speak, a “load” fund imposes a sales charge or commission when you buy or sell shares. Front-end-load classes, typically labeled “A” shares, levy a median toll of 4.25% when you purchase them. These shares are commonly sold through advisers, who pocket the load as a commission.
   On the flip side, share classes with a back-end load, typically labeled “B” and “C,” can charge you on the way out, when you sell them. B and C share classes often have higher expense ratios than A shares.
2. Initial investment size: Share classes typically vary by initial minimum investment, too. Some are built for deep-pocketed investors, such as pension funds and retirement plans. These classes, often called Institutional or I shares, can require large initial deposits of $500,000 or more. In return, institutional shares typically have low expense ratios.
   Some fund firms also offer a break on annual fees for individual investors who are willing to fork over heftier minimum initial investments. For instance, investors can buy the investor class of the Vanguard Wellington fund for an initial outlay of $3,000 and pay 0.25% in fees per year. But for an initial investment of $50,000, the fund’s Admiral share class charges 0.17% in annual fees.
3. Channel. Where you hold your fund shares — in a personal account or a 401(k), for example — or whether you use a financial adviser, may dictate the share class you own. In a 401(k) investment plan, you may be offered the I share class of T. Rowe Price Mid-Cap Growth. If your adviser purchases fund shares for you, they will likely be Advisor shares. But if you buy shares in the fund on your own, you’ll get the investor shares.
   Every class charges a different expense ratio: Mid-Cap Growth Advisor charges 1.02% in annual fees, the investor share class charges 0.77%, and the I share class charges 0.63%.

In addition, each brokerage negotiates its own deal with fund firms, says Steve Sanders, executive vice president of marketing and product development at Interactive Brokers.*

Finally, some fund firms create share classes to sell on broker platforms. For example, although American Funds’ A shares are generally adviser-sold, the firm’s F-1 share class is open to anyone, without a sales charge, at online brokers such as Fidelity and Schwab. The F-1 shares typically sport a slightly higher expense ratio than the A shares, but the difference is small.

How to shop smart among mutual fund share classes

The best way to navigate this alphabet soup is to stick with funds that trade free of commissions and transaction fees at your online broker, such as those available from Schwab’s Mutual Fund OneSource, Fidelity’s FundsNetwork or E*Trade’s menu of funds. 

If a fund is offered in a no-fee network, there’s usually just one share class available, so there’s no choosing required. And you won’t pay a front-end or back-end load. But you may pay the brokerage a short-term-trading fee if you turn around and sell the shares within 60 or 90 days, depending on the firm. 

If you must pay a sales charge to buy a fund, opt for the share class with the lowest expense ratio, if a choice is available, and plan to hold the shares for the long haul. And consider checking the full list of your fund’s share classes to make sure you’re getting the best deal available to you. 

Morningstar lists all the share classes of any given fund, including symbols, loads, expense ratios, investment minimums and purchase constraints (institutional, say). Just look up a fund, then scroll down the landing page to “Review Other Classes.” 

The Fund Analyzer tool from the Financial Industry Regulatory Authority also lists each fund’s share classes and lets you compare up to three classes to see how their respective fee schedules may impact potential returns over time — three or 10 years, say, assuming a certain annualized return. However, you’ll have to check with your brokerage firm to find out which classes are available to you. 

The complexity of mutual fund share classes may be one reason investors are flocking to exchange-traded funds. “All the different mutual fund share classes can create the perception of special deals for some people,” says Danan Kirby, a vice president at Ariel Investments. ETFs trade commission-free at most brokerages and charge all investors the same expense ratio. “Simplicity is beauty. Everyone gets the same deal,” says Kirby.

* A previous version of this article stated that Charles Schwab charged a load for the A class shares of the John Hancock Regional Bank fund. A Schwab spokesperson says that its website failed to display a footnote that explains that it waives the sales charge.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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To help you make good choices, we analyzed the 10 most widely held, actively managed funds in employer-based retirement savings plans, according to the latest data from BrightScope, a unit of ISS Market Intelligence. We've rated each 401(k) fund "buy," "sell" or "hold" below, ranked in order of retirement plan assets. Four earn a "hold"; the remaining six fetch "buy" ratings.

We excluded index funds from our detailed reviews below because index funds are built to track a benchmark, and in large part they do that. We also excluded target-date funds because we're generally fans of each of the target-date series that rank among the top 75 funds.

We cite returns and data through October 31, unless otherwise noted, for the share class of each fund that is most available to retail investors.

Where to invest your 401(k)

American Funds EuroPacific Growth: HOLD

We want to love American Funds EuroPacific Growth (AEPGX), which is one of just six foreign stock funds among the 75 popular 401(k) funds, and the biggest of them by far. It invests in developing and emerging countries. Many of its 13 managers have decades of experience. Plus, the fund charges a below-average expense ratio.

But its performance is just so-so. EuroPacific Growth beat its benchmark, the MSCI All Country World ex USA index, over the past 10- and 15-year periods, for instance, but it lagged its peers (foreign large-company growth funds) over the past one, three, five, 10 and 15 years. In sum, it's neither a terrible choice nor a winner. A "hold" rating here means "don't sell." Foreign markets are heating up – a good reason to stay put.

Dodge & Cox Stock: BUY

If there's trouble in any corner of the stock market, you can bet the seven managers of Dodge & Cox Stock (DODGX) – a member of the Kiplinger 25, the list of our favorite actively managed, no-load mutual funds – are looking to find gems among the junk.

They're value hunters to the core and favor companies with stocks that trade at a discount to their future growth potential. Recently they beefed up the fund's stake in beaten-down shares of CVS Health (CVS), which have sunk 14% since the start of 2024. The managers are disciplined about selling when stocks get pricey, too. In the first half of 2024, they sold Hewlett Packard Enterprise (HPE). The longtime holding had nearly doubled since hitting a low in 2020.

Over the past decade, the value-oriented fund has suffered in comparison with growth fund strategies and the S&P 500 Index. But Dodge & Cox Stock held up far better than the S&P 500 in 2022; its 7% loss was nowhere near the 18% decline in the broad market index. And it's a standout in its class. The fund beat 93% or more of its peers (large-cap value funds) over the past five-, 10- and 15-year periods.

Vanguard Primecap: BUY

Vanguard Primecap (VPMCX) – a storied large-company stock fund – is a good addition to any portfolio, but it's best for investors with a stomach for volatility and a long investment time horizon.

Over the past 15 years, Primecap's 14.5% annualized return beat the S&P 500 and 97% of the fund's peers (large blend funds). Between 2019 and 2021 – a go-go period for the broad market – the fund lagged its peers for three straight years, albeit with double-digit returns.

Five managers divide the assets and invest separately, focusing on growing companies priced at a discount that have a catalyst – a new product, say, or a restructuring – to push stock prices higher. Several of the fund's top holdings, including Eli Lilly (LLY), Micron Technology (MU) and Microsoft (MSFT), have logged frothy double-digit gains over the past year. We're big fans of the fund, but its recent record is a good reminder that it's best for aggressive investors.

Vanguard Wellington: BUY

Vanguard Wellington (VWELX), a Kiplinger 25 fund, is an all-in-one portfolio that holds 65% of its assets in stocks and 35% in bonds.

Dan Pozen picks the stocks, investing in durable businesses with strong future earnings potential that trade at moderate valuations. Microsoft, Apple (AAPL) and Nvidia (NVDA) are top holdings. On the bond side, Loren Moran holds mostly high-quality corporate debt and Treasuries.

Over the past 12 months, the duo have delivered a 24% total return, which outpaces 68% of its peers, moderate allocation funds. The fund yields 2.1%.

TCW MetWest Total Return Bond: HOLD

Metropolitan West Total Return Bond is now called TCW MetWest Total Return Bond (MWTRX), after parent firm TCW rebranded its MetWest funds. And that's not the only change at the fund. Two TCW bond pickers came aboard in late 2023, and the fund's most senior manager, Stephen Kane, was set to retire at the end of 2024 (though Bryan Whalen, a manager since 2004, remains).

The changes give us reason to hit pause on the fund, as does its spotty performance. Total Return Bond has lagged its peers and the Bloomberg U.S. Aggregate Bond Index in five of the past 10 full calendar years. The fund's yield, 3.9% at of the end of October 2024, falls short of peers, too. A "hold" here means "don't buy." You'll do just as well, perhaps better at times, in a bond index fund.

Fidelity Contrafund: BUY

Will Danoff has steered Fidelity Contrafund (FCNTX) as sole manager for 34 years. That says something about Danoff's stock-picking ability. First, he's experienced, having survived a few market cycles. Second, he's good: Over the past one-, three-, five, 10-, 15- and 20-year periods, Danoff has served aces over the S&P 500.

Over the years, he has learned to hold on to winners. Contrafund's top two holdings, Meta Platforms (META) and Berkshire Hathaway (BRK.A), make up nearly 24% of assets. He first bought Meta in 2012; Berkshire Hathaway, in 2002. What's more, this large growth fund has been less volatile than peers over the past decade. All told, Contrafund is a superb choice for investors looking for growth.

Vanguard Equity Income: BUY

Vanguard Equity Income (VEIPX) boasts a 2.4% yield, which tops the 1.3% dividend yield of the S&P 500. Dividend stocks in general have struggled in recent years, but they are beginning to show signs of life. The fund's three-year annualized return of 8.6%, for instance, lags the broad benchmark by less than half a percentage point.

Matt Hand, of Wellington Management, runs two-thirds of the assets, investing in companies with above-average yield, high-quality traits and reasonable valuations. A team from Vanguard's quantitative equity group led by Sharon Hill manages the rest, using a computer model that emphasizes free cash flow (money left over after operating expenses and spending to maintain and expand the business) to choose stocks. Recent top performers in the fund include Broadcom (AVGO), JPMorgan Chase (JPM) and Bank of America (BAC).

Pimco Total Return: HOLD

Pimco Total Return (PTTAX), a storied mutual fund that was once the largest bond fund in the world, has seen better days. Those rosier times occurred more than a decade ago, well before former manager (and Pimco co-founder) Bill Gross left the firm in 2014.

Recent returns have been average or worse. The fund has lagged its peers (intermediate core-plus bond funds) in six of the past 10 calendar years. And though its aim, among other things, includes seeking attractive risk-adjusted returns, the fund's risk-adjusted returns have ranked below average over the past three, five and 10 years.

A bond index fund would offer similar (though slightly lower) returns and less volatility. Pimco Total Return yields 4.2%.

American Funds Growth Fund of America: HOLD

The 13 managers at American Funds Growth Fund of America (AGTHX), which is celebrating 50 years, seek to find innovative companies across all sectors. Translation: The fund doesn't hold as big a stake in tech stocks as its peers (large-company growth funds).

We like that Growth Fund of America is not a carbon copy of other large-company growth funds. Though its top holdings include the usual suspects – Meta Platforms, Microsoft, Amazon.com, Nvidia and Broadcom – the stakes in them aren't as outsize as you see in peer funds.

The end result, however, is that the fund sports average returns relative to its peers over the past decade, with average risk. But here's the thing: This fund beats the S&P 500 over the long haul – five, 10 and 20 years – as well as over the past 12 months. That's impressive.

Last year, we suggested complementing this fund with a U.S. stock index fund, which can help lower the overall volatility of a large-company stock portfolio. We stand firm on that advice.

T. Rowe Price Blue Chip Growth: BUY

T. Rowe Price Blue Chip Growth (TRBCX), which focuses on established companies with seasoned managers and above-average growth and profitability, gets an upgrade to a "buy" rating from a "hold" last year. Manager Paul Greene now has a three-year record, and he's making his mark.

Look past his first full calendar year, 2022, though. It was a terrible time for growth stocks, and Blue Chip Growth lost 39%, lagging the broad market and peers (large-company growth funds).

Since then, by contrast, Greene has delivered a 43% annualized return through October 2024, which topped the S&P 500 and peer funds. Holding proportionately more in tech stocks, especially Nvidia and Microsoft, helped.

As those stocks have soared in recent years, Greene has been trimming his stakes and initiating new positions in other sectors, including consumer staples, energy and utilities. One such purchase, in Constellation Energy (CEG), climbed 134% over the past 12 months.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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What exactly is a hedge fund, and why should you consider investing in one?

Let's start with the basics.

A hedge fund is a pooled investment vehicle, similar in principle to the mutual funds you'd find in your company 401(k) plan. Multiple investors contribute their cash to the fund, and it's run professionally by a manager or a team of managers.

Although mutual funds are highly regulated and available to the general public, hedge funds are loosely regulated and limited to "accredited investors."

The definition of who exactly qualifies as an accredited investor is evolving, but here we can summarize it as "a person with a net worth excluding their home of $1 million or an annual income of $200,000 (or $300,000 including their spouse)."

The rationale here is that a high-net-worth or high-income person should have the financial sophistication to accept the higher potential risk that comes with lack of regulation.

To keep it simple, think of a hedge fund as a private mutual fund available only to wealthy people.

Structurally, most American hedge funds are limited partnerships, and the investors are limited partners. Some hedge funds are organized as LLCs (limited liability companies), and many offshore or non-U.S. hedge funds are structured as corporations.

But the look and feel to the investor tends to be very similar across the board.

What do hedge funds do?

There is a common perception that hedge fund managers are high-risk gunslingers, and some of the high-profile managers you see on TV match that description.

Pershing Square's Bill Ackman fits that mold. He tends to run a concentrated portfolio with large positions in just a handful of stocks.

But many hedge funds are distinctly conservative and pursue low-volatility strategies. Even the name "hedge fund" implies hedging, or risk reduction.

There are literally infinite strategies that hedge funds can pursue, and some combine different ones into "multistrategy" portfolios.

Here are some of the more common strategies you're likely to see in a hedge fund:

Long/short: A long/short strategy is a relative value strategy in which a manager buys assets they believe will rise in value and sells short strategies that they believe will fall.

For example, a manager might be long Microsoft (MSFT) and short Apple (AAPL) in the belief that Microsoft will perform better than Apple regardless of which direction the general market moves.

This strategy aims to profit from both rising and falling markets.

Global macro: Global macro funds take a big-picture approach, making bets on major economic and geopolitical trends.

These bets can include currency positions, plays on interest rates, and commodity investments.

The legendary George Soros was the prototypical global macro manager, as his most famous trade was "bankrupting" the Bank of England by shorting the British pound in the early 1990s.

Event-driven: Event-driven hedge funds focus on specific corporate events, such as mergers and acquisitions, bankruptcies or restructurings.

These are closely related to "activist" funds that buy controlling positions in companies to force changes to management or the board of directors.

Arbitrage: Arbitrage strategies involve taking advantage of price discrepancies in different markets or securities.

For example, a manager could buy gold in London and sell it in Shanghai if gold were trading cheaper in London.

Be careful with hedge funds 

There are a few warnings that come along with investments in hedge funds. The first is cost.

Hedge funds often have high fees. A 2% management fee and 20% performance fee are not uncommon.

Of course, those fees might be absolutely justified if the manager is doing something unique and the returns are within your expectations even after paying the fees.

But if the manager is executing a strategy you could just as easily replicate in an exchange-traded fund (ETF) or mutual fund, it's hard to justify paying a premium.

You should also be aware of potential lockups. Mutual funds generally have daily liquidity, and ETFs can be sold any time the market is open.

Hedge funds might only offer liquidity on a monthly or quarterly basis, and even this can be subject to conditions.

Should you invest in hedge funds?

Hedge funds earn their keep by offering strategies that are hard to find in the world of regulated mutual funds and ETFs.

But should you invest in them? The answer depends on several factors. To start, you must qualify by being an accredited investor.

Along those lines, you should be able to properly evaluate the risks involved. If you don't understand the strategy or aren't comfortable reading the often dense legal documents or auditor reports, then you should probably walk away.

Assuming you qualify and are reasonably able to evaluate them, the right fund or funds can potentially add real diversification to your portfolio and lessen your dependence on the market.

Adding strategies to your portfolio with a low correlation to your existing strategies can lower your overall risk and improve your returns.

Hedge funds offer the potential for high returns and diversification benefits, but they also come at the cost of higher fees and less regulatory oversight.

As with any investment, you should do your own research to determine whether they make sense for your portfolio.

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The backdrop, of course, is the terrible year that bonds had in 2022, as the Federal Reserve raised interest rates. (Bond prices and interest rates move in opposite directions.) Strategic Income – a member of the Kiplinger 25, our favorite no-load mutual funds – lost 11% that year, compared with a 13% decline in the Agg index. 

But over the past 12 months, the multisector bond fund has excelled, with a 4.0% return, outpacing the Agg index and its peers. 

Strategic Income invests in bonds from multiple sectors, keeping in mind a benchmark of 45% of assets in high-yield bonds (debt that's rated double-B to triple-C), 30% in U.S. government and other high-quality issues, 15% in emerging-markets debt, and 10% in IOUs from developed foreign countries. The lead managers, O'Neil and Adam Kramer, decide how much to devote to each sector; other Fidelity bond sector specialists pick the securities. 

Over the past 12 months, the managers tilted toward high-yield bonds, specifically corporate bonds and leveraged loans (short- to medium-term loans issued to firms with below-investment-grade ratings). That shift paid off as both bond sectors posted double-digit returns over the past year. Emerging-markets debt and the fund's foreign developed bond sleeve performed well, too, beating their respective benchmarks. But the fund's U.S. government debt was flat and a bit of a drag on returns. 

These days, the managers are choosing to hew closely to their benchmark's weighting. "There's a wide range of macroeconomic outcomes that could unfold in the next six to 12 months and we would prefer a neutral position," he says. In 2024, he adds, smart security selection will matter more than asset allocation. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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More than 60 mutual funds, managing a combined $55 billion, have turned themselves into ETFs in the two years since this trend started, according to data provided by FactSet Research Systems. Recently converted ETFs include Dimensional U.S. Core Equity 2 (DFAC), which has more than $20 billion in assets; JPMorgan International Research Enhanced Equity (JIRE), with more than $5 billion; Fidelity Enhanced Large Cap Value ETF (FELV) with $1.8 billion, and Fidelity Disruptive Automation (FBOT), with more than $100 million. 

On average, the converted ETFs are charging investors fees that are almost a quarter of a percentage point less than they charged as mutual funds, according to FactSet. An investor with $10,000 in a typical newly converted fund is saving $24 a year. And most of the conversions are structured to be tax-free for most investors. 

Mutual fund to ETF conversions are a growing trend 

Although a few dozen funds make up a tiny percentage of the more than 8,700 mutual funds currently operating in the U.S., more conversions are coming. At least 16 additional funds, accounting for more than $15 billion in assets, have already announced plans to convert in the next few months. 

Among those slated for conversion are Morgan Stanley's Short Duration Municipal Income Portfolio (MUIMX), with nearly $190 million in assets; and the Franklin Focused Growth Fund (FFQZX), with almost $95 million. 

Even more conversions will likely be announced in 2024, especially by actively managed and higher-fee mutual funds looking to attract more investors by providing the lower costs and easier access that ETFs offer, says Aniket Ullal, head of ETF data and analytics for CFRA Research. 

Asset managers are taking advantage of a 2019 Securities and Exchange Commission (SEC) rule change that allowed such conversions so funds could adapt to changing investor preferences. Investors have been generally transferring money out of mutual funds and into ETFs since 2015. 

The trend, Ullal believes, is beneficial. "The conversions are going to continue, and this is positive for investors," he says. 

In addition to lower fees, ETFs offer investors tax savings. Unlike mutual funds, ETFs are structured so they don't have to sell holdings and thus record capital gains when investors pull money out. ETFs, which are traded like stocks, can also be sold throughout the trading day, unlike mutual funds. And ETFs offer investors more transparency, because most ETFs publish their holdings every day, whereas mutual funds only publish once a quarter. 

How investors can take advantage of this conversion trend

Of course, there's no such thing as a totally free lunch. Conversions can cause a few hassles or financial headaches for some investors. Our three-point checklist will help you take advantage of the conversion trend and get the best portfolio for your needs:

Know your account rules. Most investors hold their mutual funds in accounts at brokerage firms (whether tax-deferred retirement accounts or taxable accounts) or in 401(k) retirement plans. In these cases, investors don't have to pay extra taxes when a mutual fund they own converts to an ETF. Brokerage account holders simply get the value of their mutual fund investment transferred tax-free into the ETF version. The new ETF has the same managers and portfolio that the mutual fund had. If you were happy with your mutual fund, you don't have to take any action in response to the conversion. 

The only possible hassle for taxable brokerage account fund holders is a small one: Mutual funds allow you to invest in dollar amounts, while ETFs are sold like stocks and so have share prices. Some brokerages will only allow you to invest in ETFs in whole shares. If you have $1,000 in a mutual fund that converts to an ETF selling for, say, $90 a share, you might get 11 ETF shares and $10 in cash. Any profit on that small amount could be counted as a capital gain at tax time.

Because 401(k)s are tax-advantaged, conversions don't trigger additional taxes for their account holders. If, like many 401(k) plans, yours doesn't hold ETFs, the fiduciaries who manage employer-sponsored retirement accounts are supposed to help you switch to another good mutual fund option, notes Jeff Naylor, the Investment Company Institute's chief industry operations officer.

There's a third type of account. Some investors invest directly with mutual fund providers using a mutual fund-only account, and they could face hassles and higher taxes. If a fund held in one of these accounts converts to an ETF, you'll get cash instead. And you will probably want to find another mutual fund to keep yourself fully invested. More problematic: If your mutual fund-only account is taxable, you could face capital gains tax liabilities. A simple solution is to open a free brokerage account and transfer the affected mutual fund shares into it prior to the conversion date. 

Check your settings. One advantage of mutual funds is that they make it easy to automatically reinvest dividends. Reinvestment is not generally automatic for ETFs held in brokerage accounts, however, so you'll need to check your account settings to make sure your broker is following your wishes for any dividend distributions. In many cases, it's just a matter of clicking on a box in a web form.

Assess the probabilities. Are your funds likely candidates for conversion? The mutual funds most likely to be converted tend to be actively managed or aimed at investors using taxable accounts, says Bryan Armour, who heads research into index funds and ETFs for Morningstar. Among the likely prospects are funds that promote tax advantages, such as municipal bond funds and stock funds that avoid dividends and stock sales, he says.

Those least likely to be converted are low-cost index funds, retirement-focused investments such as target-date funds, and specialized funds such as small-company funds that would have trouble managing rapidly changing asset levels.

If your mutual fund's expenses or tax liabilities are high, but a conversion is not on the immediate horizon, you can switch to a similar ETF yourself. Many fund companies now offer ETF "clones," or copies of their popular mutual fund portfolios. (Remember, though, that cashing out of mutual funds in taxable accounts could raise your capital gains liability for the year.) 

Alternatively, check whether your fund company currently offers, or is on track to launch, an ETF share class of your fund. Currently, only Vanguard offers ETFs that are considered a share class of an established mutual fund. But several other funds, including Dimensional, have applied to the SEC for permission to follow suit. 

Regardless of how these conversions are completed, it's clear that more are coming. If you're a fund investor who hasn't jumped on the exchange-traded bandwagon yet, your mutual fund might soon give you a nudge. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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OK, technically, mutual funds have existed in some form since the late 19th century. But the modern, open-ended mutual fund we know and love came to life on March 21, 1924, with the birth of the Massachusetts Investors Trust (MITTX), still offered up today by MFS Investment Management.

Since then, mutual funds have grown into $25 trillion-plus market in the U.S. alone, according to the Investment Company Institute's (ICI) 2024 Investment Company Fact Book.

Regardless, the mutual fund might be new to you, and that's all that matters.

We're here to help you understand mutual funds a little better.

What is a mutual fund and how does it work?

An investment fund is a pool of money from several investors that an investment firm uses to buy stocks, bonds and/or other assets.

A mutual fund is just one type of investment fund, alongside exchange-traded funds (ETFs), closed-end funds (CEFs) and others.

And mutual funds are largely defined by how they operate.

When an investor gives money to a mutual fund provider, fund management takes that money and invests it in assets. In exchange, investors receive shares of the mutual fund.

While an investor doesn't actually own any of the securities in the fund, they still are a partial owner of the fund. Thus, they're entitled to a proportional share of the profits – be they dividends, interest income, capital gains, etc. – after backing out fund expenses.

The fund's price is based on its net asset value (NAV), which is the total value of the securities in the fund's portfolio, less fees and expenses, divided by the fund's outstanding shares. That price is calculated just once per day – unlike stocks, where trades are processed as they occur throughout the trading day, mutual fund trades all settle after the close of business.

That share price usually isn't important for purposes of buying the fund, however. You typically can pay a flat dollar amount – $50, $100, $1,000, and so on – which is a pretty flexible arrangement. On the flip side, many mutual funds require a minimum initial investment when first buying the fund, and those minimums can often stretch into the thousands of dollars.

I've mentioned "expenses" a couple times now. Running a fund costs money. A fund provider can have various costs, such as fund managers, administration, marketing, and the like. To recoup these costs, mutual funds charge various types of fees. Most of these fees are expressed as the "expense ratio" – a percentage of the investment that will be automatically deducted from the fund's performance. A fund with a 1% expense ratio, for instance, charges $100 annually for every $10,000 invested.

But mutual funds can charge other fees, too. For instance, with a front-end sales charge, or "load," a portion of the initial investment is immediately taken out. So, if you invest $10,000 with a 5% front-end load, $500 would instantly go toward fees (and thus wouldn't be invested).

What are the types of mutual funds?

This question has a few different answers, as there's more than one way to categorize mutual funds.

My colleague, Jeff Reeves, has a longer explanation about what are the types of mutual funds, including breaking them down by asset class. But another important way to differentiate funds is by how they're managed.

Actively managed funds are run by one or more investment managers, who research, buy, monitor and sell investments within the fund. While they typically operate under some general guidelines – a blue-chip fund manager likely won't invest in micro-cap stocks – they often have broad leeway to invest as they see fit.

Index funds, however, invest automatically based on a rules-based index, like the S&P 500. So, for instance, an index mutual fund might track an index of large-cap tech stocks. As stocks enter the index, the fund is required to buy them in a manner that matches their weight in the index – and as they leave, the fund is required to sell them under the same parameters.

Because index funds don't require human managers (who in turn require salaries), they're often able to charge much lower fund fees. And broadly speaking, index funds on average tend to outperform professional managers.

On the flip side, index funds are constrained – they must buy what the index says they must buy, even if it might make poor investment sense. They also can't, say, exploit a quick period of extremely cheap valuations in a stock – a human manager can be much more agile because they're not being held back. Also, manager expertise can provide more alpha in certain areas of the market, such as small-cap stocks and emerging markets.

What are the pros and cons of mutual funds?

Let's look at a few upsides and downsides of using mutual funds:

Pros

Diversification: A mutual fund allows you to invest in tens, hundreds, even thousands of stocks, bonds and/or other assets with a single purchase. That helps disperse your risk across a great number of investments.

Ease of Use: You can buy or sell a mutual fund with a few clicks of a mouse, which is infinitely easier than having to buy and manage all those individual holdings yourself.

High liquidity: Mutual funds are considered pretty liquid – you can sell your shares and receive your money within days.

Automatic reinvestment plans: Virtually any investment account will allow you to automatically reinvest dividends and other returns from mutual funds. Reinvesting like this can boost the pace at which your money grows.

They only trade once per day: The fact that mutual funds trade once per day is both a blessing and a curse. The blessing? Stocks, ETFs and other assets that trade throughout the trading day can be susceptible to flash crashes, which can prompt panicked investors to sell – even if doing so wouldn't be in their best long-term interest. Mutual funds, which only change prices once a day, can be more conducive to a steadier hand.

Cons

Investment minimums: While there are exceptions, most mutual funds still require some minimum initial investment outside of a 401(k) – and oftentimes, that number is in the thousands of dollars. That's a burden for most people, but it's especially cost-prohibitive for many beginner investors.

More types of fees: This is one of the core differences between mutual funds and ETFs. Both ETFs and mutual funds charge investment management fees. But with ETFs, that's it – no more fees. Mutual funds, however, can charge 12b-1 marketing fees, sales loads, and other fees, which can make them far more expensive than comparable ETFs. (Also, the vast majority of mutual funds are actively managed, whereas the vast majority of ETFs are index funds, which creates even more discrepancy in average fees.)

Tax inefficiency: Because of the way mutual funds are constructed, the buying and selling of stocks and other assets within a mutual fund create taxable events. While they can cancel each other out, mutual funds may have to make capital gains payouts – forcing investors to account for them in their taxes, even if they haven't sold any shares themselves.

They only trade once per day: The curse of trading once per day is that you can't use mutual funds tactically. Intraday trading with mutual funds is impossible, making them ill-suited for swing and day traders.

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The result of folks not knowing how to find the best 401(k) investments is that they are not maximizing the benefits of their retirement plan. That's unfortunate because 401(k)s are an easy way to accumulate wealth and is a source of free funds; most employers match their workers' contributions up to typically 6% of their pay. 

It is also a way for many people to build wealth painlessly by contributing a monthly amount that is taken out of their paycheck and invested in available funds in the 401(k) plan.

For those who aren't familiar with what a 401(k) is, it is simply a retirement plan in which a set amount designated by the employee is taken out of their salary before taxes. This monthly amount is invested in several funds inside the company's 401(k) plan, which the employee gets to choose. 

Vanguard and Fidelity are two popular mutual fund companies that administer and offer funds in 401(k) plans. These mutual funds can be stocks, bonds, money market securities or other investments.

A note about employer matching funds: Often you have to stay an employee for five to six years for the funds to be fully vested, meaning that's when all of the company's matching money actually becomes yours.

Contribute enough to your 401(k) to at least match the employer contribution. If your company matches 50% of your contribution up to 6% of your salary, then aim to invest at least 6% of your pay. A good rule of thumb is to invest at least 10% to 15% of your pay – it could even be higher if you're investing late in life. Strive to increase your contributions every year. Some 401(k) plans will even automatically increase it for you.

If you choose a traditional 401(k) vs a Roth 401(k), you don't pay taxes on the funds or its earnings until you withdraw it. If you do so before turning 59½, you will have to pay a 10% penalty in addition to the applicable taxes. You are required to withdraw a minimum amount after 72 years of age.

How to find the best 401(k) investments for your retirement plan

Age and risk tolerance: If you are not retiring in a few years, consider being more aggressive in your investments because you theoretically will have more years to recoup your money if the accounts go south. This means allocating a larger portion of your money into stocks. Being more aggressive also means the potential to earn is even greater. Otherwise, aim for an allocation of stocks and bonds. It won't be as volatile, but the return potential is also typically less.

Simplify: Many 401(k) plans offer target date funds. These funds are structured based on your retirement year. For example, a target date fund for 2050 means it is structured for folks retiring that year. How far you are from 2050 will determine your mix of stocks and bonds in that fund, which rebalances over time as you get closer to retirement.

If you want to pick your own funds, make sure to diversify. While mutual funds by nature are technically diversified since they have to hold many securities, these investments might all be in the same country, sector or region. For example, there are tech mutual funds that hold dozens of individual company stocks but it is all in one sector. Thus an event that affects the sector impacts all the companies in it.

Also ensure that you don't invest only in funds that buy large company stocks, or large-cap funds. (Large-cap stands for large capitalization, referring to companies that have a market capitalization above $10 billion.) Make sure to have some exposure to mid-cap and small-cap funds as well. And see to it that you have a good balance of growth (fast-growing companies) and value (companies whose stocks are selling at a discount). Warren Buffett is a well-known value investor.

How to research mutual funds

There are two general investing styles in mutual funds: passive and active. Passive funds are those that invest in an index such as the S&P 500. These are considered passive because they simply buy and hold all the securities in an index for a long time with minimal turnover. Actively managed funds are run by portfolio managers who select certain securities in hopes of beating the market. However, research has shown that passively invested funds have consistently outperformed actively managed funds.

When you are a researching fund, look at its fees, performance over three, five or 10 years, and tenure of its managers if it's an actively managed fund.

Here are some websites for you to researching the best 401(k) investments:

Your 401(k) administrator's website (Vanguard, Fidelity or others) will typically offer research and educational tools for plan members to access. For example, Fidelity has an extensive stocks and funds research site to screen for mutual funds.

Morningstar: A respected name in personal finance, the site offers detailed fund profiles, performance history, and ratings. There is free, basic access and a subscription plan for more detailed information.

Yahoo Finance: It offers real-time quotes, historical stock data, analyst ratings and news. Most data is free.

Zacks Investment Research: It offers mutual fund rankings based on its proprietary scoring system plus detailed analysis. Some information is free and others are behind a paywall.

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Index mutual funds and exchange-traded funds (ETFs) have done better, on average, than most actively managed funds for years. The Vanguard 500 Index Fund (VOO), which mirrors the S&P 500 Index, has outpaced 91% of similar U.S. stock funds over the past 10 years, according to Morningstar.

Today, index funds account for more than half of assets in diversified U.S. stock mutual funds and exchange-traded funds, up from one-third of assets a decade ago. And now, "there's an index-based strategy for whatever an investor wants to get exposure to," says Todd Rosenbluth, head of research at financial data firm VettaFi.

We're still fans of active funds, of course, albeit selectively. But on average, active managers have found it tough to beat the S&P 500, which has made indexing a popular strategy. "That's why we prefer index investing over active," says Alvin Carlos, an adviser in Washington, D.C. "We don't want to invest in a losing strategy."

In recent years, however, this simple investing strategy has become more complicated. And education has failed to keep up.

"Fifteen years ago, indexing was about just measuring the broad market," says Aniket Ullal, head of exchange-traded fund data and analytics for CFRA Research. Then came designer index funds, or funds that track customized benchmarks with the goal of beating the traditional bogeys. Now, complex options-based strategies are hitting the market. Some index funds "can be tricky even for the most-sophisticated investors to understand," says Ullal.

To help you master the art of indexing, use our guide, below, to explore different parts of the indexing world for both stocks and bonds. The choices range from traditional broad-market funds to funds that zero in on certain investing styles and strategies or particular market themes to complex offerings that bear little resemblance to Bogle's big idea.

Traditional stock index funds

Funds in this category have two defining traits: They track a broad, well-known index, such as the S&P 500, the Nasdaq-100 or the MSCI EAFE, and they weight portfolio holdings by stock market value. The bigger a company's market capitalization, the bigger its position in the fund.

What you see in the index is what you get in the fund, which is why traditional index funds are good choices for your core portfolio. "That's the nice thing about indexing," says Chris Huemmer, a senior client portfolio manager at FlexShares ETFs. "It's all rules-based, so there's no strategy drift."

Even so, take the time to understand exactly what kind of index fund you're buying, the rules that govern its underlying holdings and how it has behaved in past markets. "Two products may have similar names and objectives but own different stocks," says Rachel Aguirre, head of U.S. iShares products.

Consider, for example, three small-company index funds: the iShares Russell 2000 ETF (IWM), the SPDR Portfolio S&P 600 Small Cap ETF (SPSM) and the Vanguard Small Cap Index (VB). Each fund tracks a different index, so performance varies. Companies in the Vanguard portfolio, for instance, are twice as big by market value, on average, than the companies in the other two funds. That has helped the Vanguard fund perform better in recent months because bigger companies outperformed small ones. Similarly, companies in the SPDR fund are more profitable overall compared with holdings in the other two funds because its index, the S&P SmallCap 600, limits constituents to firms with profits. That helped the SPDR ETF outperform the other two small-company funds in 2021.

Another tip: Stick with the same index family if you're buying individual funds to get large-, small- and midsize-company exposure. Pair an S&P 500 index fund, for instance, with an S&P SmallCap 600 index fund to avoid any overlap in stock holdings. We did that in the Kiplinger ETF 20, our favorite exchange-traded funds, matching the iShares Core S&P 500 ETF (IVV) with the iShares Core S&P Mid-Cap ETF (IJH) and the iShares Core S&P Small-Cap ETF (IJR).

Investors who prefer mutual funds should consider the Fidelity 500 Index (FXAIX) or the Schwab S&P 500 Index (SWPPX) for large-cap exposure. Otherwise, invest in a total market fund, which owns nearly every publicly traded stock. The Vanguard Total Stock Market trades as a mutual fund (VTSAX) and an ETF (VTI).

Strategic index funds: thematic funds

These funds also aim to beat a broad benchmark, but they come with a twist. Funds that aren't weighted by market cap fall into this category, for instance. The main types of strategic funds are focused on factors (defined as stock or company traits that have been proven to drive returns), company fundamentals or a thematic trend.

We'll start with factor funds. There are six main factors: value (inexpensive stocks), size (small-cap stocks, say), momentum (stocks with upward-trending prices), volatility (stocks with low price fluctuations), quality (financially healthy firms) and yield (stocks that pay dividends). Invest in these funds alongside your core holdings to enhance returns or reduce risk.

Factors can take years to pay off. That's why these funds are best considered long-term, buy-and-hold investments, says Nick Kalivas, head of factor and core equity product strategy for Invesco ETFs. Size and value, for instance, win over multiple decades. "Ten years is too short," he says. Quality, value and momentum, on the other hand, can reward in five-plus years.

But factor investing has some quirks. The strategies don't all work – as in outperform the indexes – at the same time. When the economy is contracting, low-volatility, value and quality factors outperform, and momentum and size tend to lag. During an economic recovery, size, value and quality fare best; momentum and volatility lag.

You can find funds that focus on a single factor – Fidelity and BlackRock's iShares each have several, to name just two shops. And some funds group factors because they pair well. Momentum and low volatility, for instance, work well together. And quality and value are good pairs, too. But the jury is out on whether you should own all the factors at once – Invesco's Kalivas says yes because it adds diversification benefits; FlexShares' Huemmer says no because it could water down returns.

That's why we favor a flexible approach. The Invesco Russell 1000 Dynamic Multifactor ETF (OMFL) stresses different factors depending on whether the economy is expanding, slowing down, contracting or recovering. The fund has outpaced the S&P 500 since its November 2017 inception and boasts a better risk-adjusted return, but it has been more volatile, too.

Equal-weight funds are factor funds because they emphasize size, in a way – every company, small or large, gets an equal share of assets. They're a way to avoid overweighting the most popular stocks of the day. Just remember, over shorter periods, performance can be choppy. For instance, while the Invesco Russell 1000 Equal Weight ETF (EQAL) is up 12.9% in the past 12 months vs the Russell 1000 Index's 28.2% gain. And although the Invesco S&P 500 Equal Weight ETF (RSP) has beat the S&P 500 Index since its April 2003 inception, it has lagged over the past three, five, 10 and 15 years.

With fundamentals funds, business metrics, such as revenue and free cash flow (a company's cash from operations after capital expenditures), matter most.

The Invesco S&P 500 Revenue ETF (RWL), for instance, ranks stocks by trailing 12-month revenue and rebalances every quarter. Walmart (WMT) and Amazon.com (AMZN) are top holdings. The fund has performed roughly in step with the S&P 500 since its February 2008 inception.

The WisdomTree US Earnings 500 ETF (EPS) holds profitable large stocks ranked by earnings. The fund has lagged over the past three, five and 10 years.

Companies that throw off cash are the focus at the Pacer U.S. Cash Cows 100 ETF (COWZ). Stocks are ranked by trailing 12-month free cash flow. Over the past five years, the fund beat the S&P 500.

Finally, the Schwab Fundamental US Large Company Index (ETF ticker symbol FNDX; mutual fund symbol SFLNX) tracks an index that ranks stocks using a combination of sales, cash flow and dividends plus buybacks. The fund lagged the Russell 1000 over the past one and five years, but it beat on a three-year basis. Fit funds like these into your portfolio as complements to your core holdings to boost returns.

Strategic index funds: factor funds

Funds that fall into the thematic subcategory let you follow your passion. These days, whatever your interest, you can find an ETF that captures the trend. There's one for working at home – the Direxion Work From Home (WFH) – and one for pet care – the ProShares Pet Care ETF (PAWZ) – and there are several clean-energy offerings such as the iShares Global Clean Energy ETF (ICLN) and the Invesco Solar ETF (TAN).

Several are technology related, including the Global X Robotics & Artificial Intelligence (BOTZ) and the Global X Autonomous and Electric Vehicles ETF (DRIV). Some market watchers, including Invesco's Kalivas, count funds that invest according to environmental, social and corporate governance principles in the thematic category.

In most cases, thematic funds are best reserved for money you can afford to set aside for the long haul. "These funds tap growth drivers that will play out over a long time period," says iShares's Aguirre.

You should buckle up, too, because they can be volatile. The Ark Innovation ETF (ARKK), for instance, soared 153% in 2020, only to lose 23% in 2021 and another 67% in 2022, before it rebounded sharply in 2023. It gained a tamer 17% in 2024.

Quasi-index funds

The lines between index funds and active funds are blurring. Some consider the strategies we describe below as actively managed. But their outcomes are tied to an index, so we consider them quasi-index funds.

Buffered ETFs. Investors who want to stay invested in stocks but can't afford – or stomach – big downdrafts are flocking to "defined outcome" funds, also called buffered ETFs, which invest in options tied to a broad index. The ETFs offer some protection from stock market losses over a 12-month period in exchange for a cap on potential gains. How much you give up in returns (the cap) depends in part on the amount of downside protection (the buffer) the fund offers. The bigger the buffer, the lower the cap.

Take the Innovator U.S. Equity Buffer ETF February series (BFEB). Investors who bought shares in this ETF at the start of February had a 9% buffer against losses and a cap on returns of 16.9%. If the S&P 500 ETF drops by up to 9% over the 12-month period ending in February 2025, shareholders lose nothing. If the S&P 500 declines by 20%, shareholders will suffer only an 11% loss.

Most buffered ETFs are linked to the S&P 500 Index, but some are tied to the Nasdaq-100, the Russell 2000 or the MSCI EAFE, among others. At the end of the one-year period, the fund resets by buying new options, which will define the buffer and cap parameters over the next 12-month period. That's why these funds typically have a month tied to their name. But you can buy and hold these funds if you like; there's no termination date.

Look for buffered ETFs from Innovator, First Trust, AllianzIM, TrueShares and Pacer. Be sure to buy shares in a defined-outcome ETF within a week of the start of its 12-month stretch in order to benefit from the fund's full downside buffer. In late March or early April, for example, buy an April-dated ETF. And stay invested for at least the full year. For investors who don't buy at the start of the period, the buffer and cap shift a bit depending on the fund's net asset value each day.

Direct indexing. This strategy once was reserved for high-net-worth individuals, largely to goose after-tax returns. It is now accessible to regular investors, thanks to free and fractional-share stock trading, as well as lower minimums to invest.

In direct indexing, also called "personalized indexing," you directly own the individual stocks of an index (or a representative set; more on that later). Plus, you can tweak your holdings to suit your needs or values. If you work for Apple (AAPL), say, and don't want or need added exposure to the stock, you can exclude it from your personalized index.

Tax-loss harvesting, which aims to reduce your capital gains tax, is key to direct indexing. Say you're tracking the S&P 500, and Exxon Mobil (XOM) shares trade at a loss in your portfolio. With tax-loss harvesting, you would sell the shares – locking in losses to offset gains in other investments – and replace Exxon with a stake in a different but similar index stock (Chevron (CVX), say) to maintain proper allocation in your portfolio.

"The end result is less of your money goes to taxes, and more stays invested and working for you," says Eric Walters, an adviser in Greenwood Village, Colorado. You wouldn't own every stock in the benchmark index when you use direct indexing – otherwise you'd limit your options to reinvest in a similar security, according to IRS rules.

Tax-loss harvesting can add up to 0.5 to 1.5 percentage points a year in returns by reducing taxes, adds Walters. Of course, the more money you have in the portfolio, the more effective the strategy, and it only works in a taxable account.

Not everyone is a believer. "You can gain tax benefits, but you risk underperforming, too," says Carlos, the Washington, D.C., adviser. Some advisers say you need to invest at least $2 million to make direct indexing worthwhile. Others say only the wealthiest investors – those in the highest tax bracket or those who know they will leave the account to their heirs – should consider it. Fees are between 0.2% and 0.4% of assets per year.

If you're interested, consider going with an adviser who offers the service. Not all do. "It's an extra expense and takes time, so the client has to really care about it," says Eric Figueroa, a certified financial planner in Folsom, California. Minimums range between $25,000 and $250,000 or more. Figueroa prefers that clients have at least $50,000.

Some brokerage firms offer personalized indexing services, too. Fidelity's Managed FidFolios have a minimum of $5,000 and charge a 0.4% fee. At Schwab, the minimum is $100,000, and fees are 0.40% for balances below $2 million. You must work with a Schwab financial consultant.

Bond indexing

Indexing with bonds hasn't received as much attention as stock indexing. That may be because historically, most actively managed bond funds have outpaced their benchmark, at least over long hauls.

But that's changing. In 2022, the worst year for fixed income in decades, bond index funds fared better than their active counterparts. In more recent years, investors rushed headlong into bond funds, particularly passive ones, as higher yields have made fixed-income investing more attractive.

That said, bond indexing comes with some caveats. Rather than hold every security in the bogey they track the way stock index funds do, bond index funds hold a sampling. Sometimes, that can drive up tracking error (the divergence between the return of the fund and the return of the index it tracks). Also, unlike an individual bond that you buy and hold to maturity, bond fund yields can shift as the mix of securities in the portfolio changes and as interest rates fluctuate (because bond prices and yields move in opposite directions).

Traditional offerings. Traditional bond index funds are weighted by market value of debt. The U.S. bond market yardstick is the Bloomberg U.S. Aggregate Bond Index, better known as the Agg. It was "never meant to be a comprehensive market benchmark," says Jason Bloom, Invesco's head of fixed-income ETF strategy. It's not diversified, for a start. Nearly 70% of the index is made up of government and government-agency bonds. And it excludes some key sectors, including high-yield debt.

That said, an Agg-based index fund works as a core holding. Our favorites are the Fidelity U.S. Bond Index Fund (FXNAX), which yields 4.3%, and the iShares Core U.S. Aggregate Bond ETF (AGG), which yields 4.5%.

Fill in the gaps of the Agg by peppering your portfolio with small doses of bank loans, high-yield corporate credit and even preferred securities (bond investments with stock-like features) to boost your return over time. For high yield, we favor the SPDR Portfolio High Yield Bond ETF (SPHY), which yields 7.5%. Our favorite floating rate fund is the Invesco Senior Loan ETF (BKLN). It yields 6.7%. For preferred stock ETFs, we like the iShares Preferred & Income Securities ETF (PFF), which yields 5.8%.

Factor funds for bonds. It's a new-ish category, so there aren't many factor-based bond funds. But we found a few we like.

The FlexShares High Yield Value-Scored Bond Index Fund (HYGV) and the iShares High Yield Bond Factor ETF (HYDB) emphasize securities that score well on quality and value measures, though their approaches are different. Over the past five years, both funds outpaced the typical high-yield bond fund, with better than 3.7% annualized returns. The FlexShares fund yields 7.1%; the iShares fund, 7.0%.

Securities in the ultra-short-term bond fund Fidelity Low Duration Bond Factor ETF (FLDR) are weighted by interest rate sensitivity. Over the past three months, the fund's 0.7% return outpaced 77% of other ultra-short bond funds. It yields 5.0%.

The Invesco Fundamental Investment Grade Corporate Bond ETF (PFIG) relies on book value (assets minus liabilities), sales, dividends and cash flow to weight securities. Over the past 10 years, the fund beat 79% of corporate bond funds. It yields 4.7%.

Laddering for income. To smooth out current income, some investors build a bond ladder, which involves buying bonds that mature at increasing intervals, say, every year over the next 10 years. As each bond matures, you reinvest the principal in the long end of the ladder.

Now, thanks to Invesco and iShares, you can build a bond ladder with index ETFs. These target-maturity funds, dubbed Invesco BulletShares and iShares iBonds, offer instant diversification and more liquidity than you'd get by buying individual bonds.

You can invest in a ladder of investment-grade corporate debt or high-yield IOUs with Invesco BulletShares funds. Maturity dates stretch through 2032. The iShares iBonds suite has a Treasury track or an investment-grade corporate debt track, with maturity dates that fall through 2033.

Should you choose an ETF or mutual fund?

Should you go with an exchange-traded or mutual index fund? It's largely a matter of personal preference. Mutual funds and ETFs are both easy to trade and offer diversified exposure to a swath of the market in one step. They both pool assets from shareholders and invest in diversified baskets of stocks or bonds or other assets. And both ETFs and mutual funds charge an annual expense ratio. But they differ in key ways, too.

Trading. Mutual fund trades are executed once a day, after the market closes. In some cases, you may have to pay a transaction fee to purchase shares in a mutual fund. ETF shares trade during the trading day, just like stocks do, for no fee at most brokers.

Minimums. Some mutual funds have no minimums. But the initial investment for a Vanguard index fund is $3,000. No ETF is that pricey – the minimum is the price of one share.

Expense ratios. ETFs have lower expense ratios than mutual funds, generally speaking. Part of the reason is that most ETFs are index funds, which are less expensive to run than actively managed funds. But ETFs also don't incur certain expenses that mutual funds do, such as fees paid to list the mutual fund on a brokerage firm's no-transaction-fee platform, for instance.

Capital gains distributions. ETFs are structured to be more tax-efficient than mutual funds. ETFs don't actually buy and sell the underlying securities in their portfolios; third parties called authorized participants do it for them. Because an ETF isn't making actual cash transactions, it is less likely to make capital gains distributions to share­holders. (You still owe capital gains taxes when you sell shares.)

That's not the case with a mutual fund. If a mutual fund sells a security in its portfolio and pockets a profit, it is required to pass on those gains to shareholders at least once a year in the form of a capital gains distribution. This doesn't apply if you hold the fund in an IRA or a 401(k). These investments are shielded from tax until you withdraw from the account. But if you hold the fund shares in a taxable account, you're vulnerable to an unexpected tax bill.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance, but has since been updated. Subscribe to help you make more money and keep more of the money you make here.

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The TCW Enhanced Commodity Strategy (TGABX) aims to beat an index that tracks a basket of commodities, including copper and cotton, by investing in futures contracts backed by high-quality short-term bonds. 

Since then, however, inflation rates have declined and, on the whole, commodity prices have as well, despite recent gains in the value of oil and gold. Over the past 12 months, the Bloomberg Commodity Index has dropped 8.7%. The fund has fared even worse, losing 9.8% over the past year. It lagged the benchmark and peer funds that invest in a broad basket of commodities. 

The short explanation is that in the back half of 2022, the fund's short-term bond portfolio, which accounts for about 90% of assets, was a drag on performance, as the Federal Reserve raised interest rates to fight inflation and cool the economy. (Bond prices and interest rates move in opposite directions.) 

And so far in 2023, the decline in commodity prices overall has weighed on the fund's returns. "When you see slowing economies across the globe, you generally see softness in commodity prices," says Ruben Hovhannisyan, who co-manages the fund with three other TCW bond strategists. 

Commodities could turn around in 2024

Some strategists expect commodity prices to move higher in 2024. The "commodity super-cycle bull continues to march on," says John LaForge, head of real asset strategy at Wells Fargo Investment Institute. 

Hovhannisyan, on the other hand, says it's difficult to predict commodity cycles but that the fund should recover when the Fed begins to cut interest rates. "When the interest rate cycle turns," he says, "you should see some payback." 

Commodities can be volatile assets at times. But a small stake in this fund as part of a broad portfolio can help hedge inflation and boost diversification. On the latter aim, the fund didn't disappoint in 2022. It gained 13% as both stocks and bonds posted double-digit declines. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Though mutual funds can offer access to a wide range of investments, it’s easier than you might think to end up with a portfolio that’s unintentionally concentrated. Even if you own multiple funds, you may be invested in securities that are similar or exactly the same. And that could put your money at risk — especially if you’re near or in retirement.

Here’s an example:

A few weeks ago, a prospective client came to me for a second opinion on his holdings. He believed his portfolio was adequately diversified because he owned seven different funds from one well-known investment group.

Many of the same top stocks held in mutual funds

But when I took a look, I found that $400,000 of his $500,000 portfolio was concentrated in four of that group’s flagship funds. Interestingly, the holdings in those four funds looked amazingly similar.

• Fund A’s top holdings included Microsoft, Apple and Alphabet (aka Google)
• Fund B’s top holdings at that time were Apple, Microsoft and Amazon
• Fund C’s top investments were Apple, Microsoft and Facebook
• Fund D’s top holdings were Microsoft, Apple and Alphabet

The overlap didn’t end there. The other funds’ holdings were also strikingly similar. Even more concerning is the fact that the top positions represent a disproportionately large percentage of the fund’s assets.

Here was a guy who thought he was playing it safe by investing in several mutual funds. Instead, he owned stock in mostly the same few companies across his funds. Not to mention that such a heavy investment in one sector could also have put him at risk. If there had been, hypothetically, a prolonged sell-off of those tech stocks, it could have crashed his retirement.

Better alternative strategies available

The thing is, I actually liked the companies this gentleman’s funds were holding. But with that much to invest, if he wanted those or any stocks that much, he could have just purchased them on his own and avoided the high costs often associated with mutual funds. And he wouldn’t be looking at his statements each month believing his funds were providing the diversification he needed to safeguard his nest egg. There are potentially better alternative strategies available that could be utilized to achieve his goals.

OK, I know what you’re thinking: What are you supposed to do if most or all of your money is sitting in your 401(k), and you have a limited menu of stock-and-bond mutual funds?

My first recommendation would be to learn enough about investment basics so you can evaluate the funds you’re offered and make good choices, keeping true diversification in mind. Or you could hire a financial professional to help you review and assess the performance, costs and other aspects of each available option.

If you’re a do-it-yourselfer and you like the simplicity of a target-date fund, you should be careful and investigate the fund’s actual holdings and track record. You might find there is more risk in target funds than you realize.

If you left behind a 401(k) with a former employer, you might consider transferring that money into a traditional rollover or Roth IRA. You will likely be given access to more and often better investment options.

A financial professional can help you check across all your different accounts — including your spouse’s — to be sure you’re avoiding an overlap. Or you can use the U.S. Securities and Exchange Commission’s EDGAR search tool to view company prospectuses and get more information about investing in mutual funds.

What to do if you find you’re overly concentrated

If you find you have some duplicates in your holdings, or you’re overly concentrated in a certain sector, you can decide whether it makes sense to sell and invest in an area where you don’t have as much exposure. (Make sure you understand the tax consequences of selling if you’re working with holdings in a taxable account, though. It might be better to make necessary adjustments in a tax-deferred retirement plan rather than an account that’s taxable.)

An experienced financial adviser can also help you decide on an appropriate level of exposure to a certain stock or sector based on your age, risk tolerance and other factors, no matter where you’re keeping your money.

He or she can keep you up to date, as well, on what’s happening in the U.S. and international markets, and with the U.S. and world economies, and explain how those changes might affect the balance of the investments in your accounts.

Keep in mind that portfolio diversification can be especially important for older savers, who don’t have as much time to recover from an investing error or oversight. Mutual funds have a reputation for having built-in diversification — but that’s not always true. If you don’t pay attention to your fund’s specific portfolio, you could actually end up limiting your gains, increasing your risk and potentially blowing up your retirement!

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Mutual funds are popular investments for Americans, and for good reason. They are simple one-stop shops that can offer sophisticated strategies or diversified portfolios in a single holding.

But with more than 8,000 mutual funds registered in the U.S., it can be very difficult to choose the right option for you.

If you're unclear on exactly how mutual funds work, please refer to Kiplinger's guide to how to find the best mutual funds for beginners.

After you gain a basic understanding of the foundations for the mutual fund market, this list of the types of mutual funds will help steer you toward an investment that fits your personal needs.

And be sure to consult Kiplinger's Mutual Fund Guide For 2025.

What are the types of mutual funds: active vs passive 

Mutual funds can be categorized in several different ways. One of the most common is to delineate between "active" funds and "passive" funds.

Active funds are managed by a human who picks investments based on their unique expertise. Passive funds, on the other hand, are comprised of a fixed list of investments driven by an index.

The most common index funds are benchmarked to the S&P 500 Index of the 500 largest publicly traded U.S. companies.

History shows active management often underperforms. This is either down to poor picks by the managers or simply because the cost structure for active funds tends to be higher and, as a result, these expenses will eat into the overall performance.

For instance, more than half of the money managers behind U.S. large-capitalization stock funds underperformed in 2023 to mark the 14th consecutive year of lagging their benchmark, according to S&P Dow Jones Indices.

However, some investors prefer to chase the hopes of outperformance – regardless of the historic odds.

What are the types of mutual funds: asset class

Beyond this main distinction of active vs passive, perhaps the most useful way to sift through the various types of mutual funds is to break them down by asset class.

You can find active and passive funds in each of the following categories.

Bond mutual funds: These mutual funds exclusively hold bonds, which are debt securities issued by corporations as well as government entities.

Bonds typically are stable drivers of regular income, but they are exposed to risks based on the creditworthiness of the issuer.

Bond prices are also sensitive to changes in interest rates.

Stock mutual funds: Stock funds own baskets of publicly traded companies.

Portfolios can vary based on size of companies held as well as geographic and/or sector focus. They can also hold a blend of stocks based on what the managers like.

Like all individual stock investments, stock mutual funds carry market risk.

Alternative asset funds: There is a small universe of boutique and tactical investments that look beyond the traditional stock or bond markets.

These funds can sometimes own things like gold or other commodities, complex financial instruments like options that are used to make big directional bets on an asset class, and other strategies a hedge fund or similar money manager might deploy.

These alternative mutual funds can carry significantly higher risks and require more research.

On the plus side, they offer tailored solutions that can often be more accessible than you'd find in an elite hedge fund or private equity fund.

Balanced mutual funds: As the name implies, balanced funds carry a balance of assets.

Many investors are drawn to mutual funds because they are transparent, easy to trade and offer built-in diversification.

But if you're looking for a mix of stocks and bonds, that might mean managing those positions yourself.

Balanced funds look to take that housekeeping out of the equation by offering a target mix – like, say, 60% stocks and 40% bonds – and rebalancing regularly to keep you there.

Target date mutual funds: Technically a balanced fund, target date funds are popular enough to deserve their own explanation.

These mutual funds offer an asset mix that gets progressively more conservative as they approach a specified year, which is commonly the retirement date of the investor.

For instance, a target date 2025 fund has already ratcheted down its risk profile to preserve the cash of investors at or near retirement.

Meanwhile a target date 2040 fund is still pretty aggressive right now, as the investors have almost two decades before its target date.

All target date funds are unique in both their current make-up and their "glide path" over time. But they all function in a similar way.

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Mutual funds are often the very first investments many of us own as they are diversified, owning a pool of assets instead of just a single stock or bond, and they allow you to rely on expert money managers instead of having to make all the decisions by yourself.

But given the number of options that are available – including Kiplinger's favorite no-load mutual funds – how do you narrow it down to what is best for you, particularly if you're just a beginner on your investing journey?

How to find the best mutual funds for beginners

To find the best mutual funds for beginners, look at yourself first. The best mutual fund for you may not be the best mutual fund for your neighbor. Investing decisions are always very personal, so the first step is figuring out exactly what your goals are.

There's no need to rush! Many beginners make the mistake of getting lost in investment research without a good understanding of what they're even looking for. So before you dive into what are the types of mutual funds, ask yourself a few foundational questions first.

What kind of investment account do you have?

The "plumbing" of your investment account may seem mundane, but can determine what mutual funds you can and cannot buy. Start here so you don't waste your time learning about a fund that's not even an option.

For instance, with employer-sponsored 401(k) plans, you can invest your money without paying taxes up front. However, the list of options can be pretty limited with just 10 or 12 total mutual funds to pick from. IRAs do provide more options, as do taxable investment accounts, but come with more complexity.

What company is your asset manager?

Whatever your platform, some mutual funds may come with incentives that set them apart. For instance, Fidelity has some "zero" funds that don't charge a single penny in expenses – so long as you have an active account with them, of course.

This means you have to consider your specific investment provider, and how it treats certain funds, before looking at what's out there for everyone. 

How much money do you have?

Some mutual funds require you to meet a threshold in order to buy in. This can be as low as $1,000, but other times that hurdle could be significant. 

And even if you have enough to buy into one fund, you might not want to be forced to put all your eggs in one basket. This is why knowing the amount of money you have available to invest is so important when figuring out how to find the best mutual fund for beginners. 

What is your big-picture investing strategy?

Of course, sometimes putting all your cash behind one specific strategy isn't a bad thing – so long as you know what you're getting into. Have a clear sense of what your investing goals are before you look at a group mutual fund investments that may turn out to be non-starters. 

Do you want diversification and low-risk returns? Or are you chasing growth and profits, even if that means you could see material losses should the market move away from you? Finding the best mutual fund requires you to think about questions like these – especially as you are starting your investing journey.

Consider style, returns, AUM and expenses

Armed with the answers to these foundational questions, it becomes easier to find the best mutual funds for beginners. Generally speaking, novice investors and those without multimillion-dollar portfolios are well-served by prioritizing a few simple metrics when choosing their investment options. These include:

Style: Mutual funds are labeled based on the assets they hold. This doesn't just include a label of stocks vs bonds, but also the kind of stocks a fund holds. If you already figured out your strategy and goals, the style of a fund should give you a quick read on whether a given mutual fund is appropriate or not. 

Performance vs benchmark: Earning 10% profits sounds great … but consider the S&P 500 Index rose more than 15% through the first eight months of 2023. If you're settling for 10%, you're not doing well! The same is true when researching mutual funds. Make sure you're looking at both short- and long-term performance vs the appropriate benchmark, and not just in a vacuum.

Assets under management: While smaller mutual funds can indeed deliver, beginner investors generally shouldn't be looking off the beaten trail for unsung heroes on Wall Street. Stick to funds that have at least $1 billion in total assets under management to ensure you're putting your money into investments that are popular and well established.

Expense ratios: Expressed as a percentage, the expense ratio is the amount you will be charged in annual fees. For instance, 0.10% adds up to $10 annually on $10,000 invested. If you find two funds similar in their makeup and performance, go with the cheaper one. At the end of the day, these lower expenses will help increase your long-term return.

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Global blend funds invest the world over, in both bargain-price stocks and faster-growing fare. The category has lagged the U.S. market recently, but some top-performing funds have maneuvered smartly through geopolitical challenges such as COVID and trade tensions. 

The Jensen Global Quality Growth Fund (JGQSX) notched a 5% return in the year ending May 31, putting it in the top 10% of its category, according to research firm Morningstar. As the fund's name suggests, the managers are focused on two main factors: strong growth prospects and healthy finances, demonstrated by competitive advantages and good cash flows, says Allen Bond, a co-manager of the fund and head of research for Jensen.

Managers look for proven gems

The managers start by screening for companies that have achieved a return on equity (a measure of profitability) of at least 15% for the past 10 years, which generally limits them to large, well-established companies. 

"We are not trying to find hidden gems that have yet to prove themselves as viable businesses," Bond says. Then, they zero in on companies with strong growth in free cash flow (cash left over after operating expenses and spending on assets such as buildings and equipment). Because of the focus on quality and growth, the average price-earnings ratio for fund holdings was about 23 recently, compared with a P/E of 19 for the S&P 500 Index. The concentrated portfolio held only 35 stocks at last report. 

The fund's top holding is Dow stock Microsoft (MSFT), which gets about half of its revenue outside the U.S. Bond is bullish on the company's growing cloud-computing services. He also likes AstraZeneca (AZN), the European pharmaceutical giant, with some cancer and diabetes drugs in the pipeline that could boost sales.

The fund aims to make international stocks about 40% of its portfolio. Among its domestically focused holdings is blue chip stock UnitedHealth Group (UNH), which should benefit from higher demand for healthcare as the nation ages, says Bond. 

The fund charges expenses of 1.25% annually, slightly above average for its category. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Some readers may think I'm quoting Bogle as an excuse for a column I wrote last year on the stocks of emerging markets. I issued some warnings, but I was generally upbeat. As it turned out, the stocks performed poorly. The exchange-traded fund iShares MSCI Emerging Markets (EEM), which is linked to a popular index, has lost 8.5% in the past 12 months, compared with a gain of 2.9% for the U.S. benchmark, the S&P 500 index. 

Still, the relative attractiveness of shares in emerging markets has not waned. To the contrary: In times of global instability, investors grow especially wary of emerging markets, which is exactly why I like them now. 

In its latest analysis, the research firm MSCI says that the 1,377 stocks that make up its Emerging Markets Index – the basis of the iShares ETF – have an average price-earnings ratio of just 12, compared with 19 for the S&P 500. The ratio of price to book value (or net worth on the balance sheet) for the emerging index is 1.6, compared with 3.8 for the S&P 500. 

In other words, emerging-markets stocks are considerably cheaper than U.S. stocks. Of course, emerging markets are riskier; their standard deviation, a measure of volatility, averaged about one-fourth higher than the S&P 500 over the past five years. So if you can't stand the risk, stay out of emerging markets. But these stocks give your portfolio a chance to get extra gains. 

Emerging markets are covered by a big tent

The term emerging markets is an inclusive one. Some of these markets have already emerged, including China, South Korea and Taiwan. Others, such as Kenya, Jordan and Pakistan, are tiny. Together, emerging markets represent about 11% of global market capitalization (that is, price times shares outstanding for all stocks). 

As I pointed out last year, emerging markets are expected to be the only source of population growth – a key component of economic growth – over the next century. 

The first question to address is China. Last year, I told readers to stay away and invest only in funds with little or no exposure to its stock markets, such as the iShares MSCI Emerging Markets ex China (EMXC). Owning zero Chinese shares, the ETF did lose a bit less than the emerging-markets benchmark as a whole. 

The ex-China ETF remains a good alternative for emerging-markets investors who want to avoid China for moral or ideological reasons. My own view is that China is an inextricable part of the global economy and will remain so despite what you hear from both sides of the congressional aisle. But there are two areas of jeopardy. 

The first is that the COVID pandemic and the Ukraine war have encouraged U.S. companies to limit exposure to riskier, attenuated Chinese supply chains. The second is that the Chinese government itself has taken a self-destructive stance toward technology companies, which the Communist Party believes are becoming too powerful. But I doubt China can continue to hobble these businesses, which are valuable national assets, and there are signs the crackdown is easing. 

As a result, I'm letting Chinese tech stocks – which are not subject to supply-chain worries because the "travel" they do is almost exclusively electronic – out of the doghouse. For example, Tencent (TCEHY, $40), a diversified online advertising and financial technology firm with a market cap of $380 billion, has rallied since late last year but still trades at less than half its 2021 peak. Alibaba (BABA, $80), a global internet retailer, has dropped nearly two-thirds from its high. The stocks rank second and fourth among the constituents of the EMI. (Stocks and funds I'm recommending are in bold; prices are as of May 31.) 

Shares of a smaller Chinese tech company, Baidu (BIDU, $123), a search-engine firm that moved aggressively into artificial intelligence more than a decade ago, dropped more than 30% this spring. Baidu has research facilities in Seattle and Silicon Valley as well as Beijing, and its AI assets could propel it much further than its current $43 billion market cap. 

The main beneficiaries of concerns about the security of supply chains to Asia will be Latin American stocks, especially those of Mexico. T. Rowe Price Latin America (PRLAX), a managed mutual fund, has risen 11.9% so far in 2023 after outperforming the S&P 500 by nearly 20 points in 2022. Its portfolio is dominated by Brazil and Mexico. It has a heavy weighting of financials (32%), such as Itau Unibanco (ITUB, $5), and consumer staples stocks (21%), including Wal-Mart de Mexico (WMMVY, $38), which is yielding 3.4%. 

Another good choice is the iShares Latin America 40 (ILF, $25), an ETF geared to an S&P index of the 40 largest stocks in the region. The fund is more weighted toward resource stocks, such as Vale (VALE, $13), the Brazil minerals giant. Another leading asset in the portfolio is America Movil (AMX, $21), the Mexican telecom company with a market cap of $70 billion. The ETF's performance over the past three years has been exceptional: an annual average return of 14.4%. The fund has a robust dividend yield, and its expense ratio, at 0.47%, is about one-third that of the T. Rowe Price fund. 

The best way to buy Mexico alone is through the closed-end Mexico Fund (MXF, $16), which trades like a stock. It has produced remarkably steady returns for an emerging markets fund. The portfolio includes Grupo Mexico SAB (GMBXF, $5), whose interests range from copper to rail transport to oil drilling infrastructure and wind farms. The stock yields 5%.

Do emerging markets have more room to run?

But is Latin America overvalued? I don't think so. The iShares Latin America fund had six losing years between 2013 and 2021 and has registered an overall loss since 2008. Waiting for Latin America to shine has been frustrating, but a glow may have begun. 

An emerging market that has intriguing possibilities is Poland, the fifth-most-populous nation in the European Union. The Russian invasion of Ukraine caused the iShares MSCI Poland (EPOL, $17) to fall sharply last year, but so far in 2023, the ETF has bounced back 9.2%. Polish stocks are part of the portfolio of the T. Rowe Price Emerging Europe (TREMX), a mutual fund whose assets also include Greek and Hungarian banks and Koc Holding (KHOLY, $19), a Turkish conglomerate with a market cap of $10 billion and a P/E of 4. 

As for Asia: I still like India, especially HDFC Bank (HDB, $64), with a market cap of $109 billion, and the closed-end India Fund (IFN, $15). In Thailand, GDP is expected to grow 3.8% this year, according to The Economist's consensus of experts. Thai Beverage (TBVPY, $43), with a market cap of $10 billion and a yield of 4.1%, is a good way to gain exposure to the country. The company makes and distributes beverages (both alcoholic and nonalcoholic) and snacks. Another good buy is Sea Ltd. (SE, $57), a Singapore-based digital commerce, financial and entertainment company with a strong following in Southeast Asia. 

Am I predicting emerging markets will soar over the next year? Of course not. I'm reminding you that emerging markets are where the growth is, that artificial intelligence may prove to be a great way to distribute the benefits of education and work training around the world, and that stock prices look very tempting. 

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns none of the securities mentioned here. You can reach him at JKGlassman@gmail.com.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

What they're talking about is having an asset allocation plan, which divvies up your money into stocks, bonds, cash and other assets in appropriate proportions according to your goals, how long you plan to invest and your tolerance for risk. 

The advice is sound. By spreading your money among different kinds of assets – diversifying your investments, essentially – you lower the chance that you'll lose money because, theoretically, they won't move in lockstep. 

But asset allocation strategies were seriously tested in 2022, when stocks and bonds fell in tandem. Diversification goes out the window during such market crashes, "just when investors need it the most," says Sebastien Page, chief investment officer at T. Rowe Price and author of "Beyond Diversification: What Every Investor Needs to Know About Asset Allocation." 

Even so, asset allocation matters. One old Wall Street saw says it drives 90% of portfolio returns. But in fact, asset allocation affects portfolio volatility more than returns. "You engage in asset allocation because, like ballast in a boat, you want to minimize the sway of the portfolio," says Sam Stovall, chief investment strategist at investment research firm CFRA Research. More important, "because you're smoothing out the fluctuations, your emotions are less likely to become your portfolio's worst enemy," he says. 

Smart investors will view the turmoil of 2022 as a sign that some tweaks to their portfolio may be required. After all, the market has changed. Bond yields are higher and cash, at long last, can earn a decent interest rate. Inflation, despite recent declines, remains high.

Meanwhile, U.S. stocks, down from their peak in late 2021 even after a rebound, are still expensive relative to shares in other countries' markets. Foreign stocks have been outperforming their U.S. counterparts in recent months.

To help you decide how to apportion your portfolio, we went to the experts. We polled some of the best asset allocators in the business for their thoughts on how to construct a portfolio. The process is part art and part science. We'll walk you through the steps the pros take to help clients build their portfolios so you can benefit, too.

Know your investing goals and risk tolerance

Asset allocation is basically about "getting the right mix of assets given your risk tolerance and risk capacity, or time horizon," says Robert Williams, managing director of financial planning at Charles Schwab. "Balancing those risks is the key to investment planning."

Before professional advisers get into that, however, they get a full picture of your finances and square away important questions first. 

"What are we trying to accomplish?" asks Ryan Viktorin, a certified financial planner at Fidelity Investments. Are you saving for retirement, college, a down payment on a house? "When is that happening? Five years away, or 25 years away?" Viktorin continues. "Once you have that framework, you can start to know how to invest given what you hope to accomplish," she says. 

Risk capacity. Your time horizon is easy to nail down. Your child's first college tuition bill will land in two years, for example, or you plan to retire in 10. 

"Time horizon is a big driver of the amount of risk you can take on in the portfolio," says T. Rowe Price's Page. Money needed for a down payment on a house in three years, for instance, should be invested in cash or short-term bonds, not stocks, because you may not have enough time to make up any potential losses. 

Risk tolerance. Figuring out how much volatility you can stomach – your tolerance for risk – is tougher. "Risk tolerance is a fuzzy concept," says Page. It's emotional. It also varies from person to person, and it may be colored by market conditions. 

"People say they want to take lots of risk when markets are rising and no risk when markets are falling," says David Born, a certified financial planner in Orinda, Calif. Likewise, major life events can have an effect, too. If you're going through a divorce, for example, "no matter who you are, you're going to have a low tolerance for risk," says Blaine Thiederman, a certified financial planner in Arvada, Colo.  

Most money managers, from digital robos to high-net-worth advisers, pose questions to gauge how aggressive or conservative you are as an investor. Much of it boils down to assessing how you will react during a market crash. If your portfolio declines by 20% in one year, are you likely to stay the course or change the portfolio? 

Even better is a real-life example. "What investment changes did you make in 2022? Did you sell? Did you buy? Do nothing?" asks Sabino Vargas, a senior financial adviser and certified financial planner at Vanguard. "We tend to remember what happened most recently, so these are good questions to ask now." 

If you sold investments in 2022, you are less risk tolerant (or more conservative) than someone who did nothing (moderate) or the investor who bought during a downdraft (aggressive). 

Of course, we're paring down a complex task that advisers say requires time and effort. Getting a handle on your risk tolerance "is not a precise or scientific approach. It's by feel," says David Kressner, a managing adviser at Altfest Personal Wealth Management. But it is critical to building the right asset allocation strategy because the best portfolios are the ones you can stick with over time, even through big market drawdowns. 

"Making imprudent decisions at the wrong time can have a meaningful impact on your outcome," says Kressner. "Avoid those mistakes by having the right allocation in place." 

How much should investors put in stocks, bonds and cash? 

Both risk capacity and risk tolerance play a role in how much you put in the basic building blocks of every portfolio: stocks, bonds and cash. Although most model portfolios are tagged with names that point to risk tolerance – conservative, moderate and aggressive, mostly – they also point to time frame. In his book, for instance, T. Rowe Price's Page refers to what he calls life-cycle-based model portfolios in terms of years to retirement – 20 years before retirement, 15 years, 10, 5 and zero. 

In the end, the most important decision you'll make is how much you put in stocks, says Page, "because it is the most effective way to calibrate your risk level in the portfolio." Use the model portfolios below as a broad-brushstroke guide to constructing a portfolio that's right for you. Read on for ideas on how to fill in the picture. 

Stocks. Stocks offer the biggest reward over the long term, but the trade-off is high volatility. Over the past 20 years, stocks have returned an annualized 10.0%, but they suffered four bear markets – technically defined as a decline of 20% or more from the most recent peak. What's more, in any given calendar year – and in some years more than once – the S&P 500 Index tends to dip 5% to 10%. 

There are dozens of ways to slice your stock portfolio. The division of assets between U.S. and foreign shares is just the start. Within the international portion, you can choose among developed markets and emerging markets. And for both U.S. and foreign stocks, you can home in on company size (small, medium or large) or tilt toward investment style (growth or value). Or you can focus on certain sectors – technology, energy, materials or industrial stocks, for example. 

You can keep it simple by investing in index funds that cover the whole swath of stocks, such as a total stock market mutual fund or exchange-traded fund, for instance, which holds a stake in nearly every publicly traded stock in the U.S. 

Our favorites include the Vanguard Total Stock Market ETF (VTI, $207, expense ratio 0.03%), which also trades in a mutual fund share class (VTSAX, 0.04%), and its international stock counterpart, the Vanguard Total International Stock Index (VXUS, $54, 0.07%), or its mutual fund version (VTIAX, 0.11%). The Fidelity Zero Total Market Index (FZROX) and the Fidelity Zero International Index (FZILX) are both broad index funds that charge no annual expenses.

Or leverage index funds to access slices of the stock market. That makes it easy to tilt your portfolio tactically, says Thiederman, the CFP in Arvada, Colo. "We piece out each part of the allocation with its own ETF to give us control to make adjustments to the portfolio," he says. His holdings include Vanguard ETFs that focus on U.S. small-company value stocks, U.S. small-company growth stocks and the like, as well as individual funds that focus on large-company and small-company stocks in foreign developed countries and in emerging markets.

But don't worry about getting so narrowly focused if that isn't your thing. "Granularity adds value, but it's not a requirement," says Schwab's Williams. Choosing an asset allocation and saving and investing, Williams says, can be like constructing a rocket ship: "You shoot it in the air and head toward a destination. You may change the steering here and there," tweaking your stock portfolio with more foreign shares, say, or small-cap stocks, "but generally you're all moving in the right direction." 

Bonds. Bonds provide ballast against stock volatility – 2022 notwithstanding – but the trade-off is lower returns. Over the past 20 years, the Bloomberg U.S. Aggregate Bond Index returned 3.2% annualized. In that period, it had just three years of negative returns, in 2022 (–13.0%), in 2021 (–1.5%) and in 2013 (–2.0%).

But bonds can do more than just play the foil to stocks. They can also generate income, preserve capital and hedge against inflation. A core bond fund can go a long way toward meeting those objectives: Our favorite actively managed fund is the Baird Aggregate Bond (BAGSX, 0.55%). The fund, yielding 3.8%, is a member of the Kiplinger 25, the list of our favorite actively managed, no-load funds. 

Or consider the iShares Core US Aggregate Bond ETF (AGG, $99, 0.03%), yielding 4.0%. You can fine-tune your portfolio to specific objectives with the right mix of bonds. Determine what you need most from your bond portfolio – income, preservation and/or diversification from stocks – then match the objective with the right kind of bonds. 

To diversify from stocks, stick with high-grade bonds, such as Treasuries or government-guaranteed mortgage-backed securities. Buy Treasuries directly from the government at TreasuryDirect.gov and hold to maturity. ETFs are another option. The iShares US Treasury Bond ETF (GOVT, $23, 0.05%) holds debt with short-, medium- and long-term maturities and yields 4.0%. Our favorite mortgage-bond funds include the Vanguard Mortgage-Backed Securities ETF (VMBS, $46, 0.04%), which yields 3.2%, and the Vanguard GNMA (VFIIX, 0.21%), which yields 3.1%.

To generate income – an easier task these days thanks to higher rates – focus on high-quality, investment-grade corporate bonds (debt rated between triple-A and triple-B). The Vanguard Intermediate-Term Investment-Grade (VFICX, 0.20%) yields 4.9%. Add some oomph, if your risk tolerance allows, with small doses of high-yield bonds (debt rated double-B to triple-C) or emerging-markets bonds. The Osterweis Strategic Income (OSTIX, 0.84%) tilts toward debt with maturities of five years or less and recently yielded more than 7%. The Vanguard Emerging Markets Bond (VEMBX, 0.55%), another Kip 25 fund, yields 7.3%.

For capital preservation, focus on high-quality, short-term bond funds, which yield roughly 4% these days. The Baird Short-Term Bond (BSBSX, 0.55%) holds a mix of government and corporate debt – triple-A-rated debt makes up nearly half of the portfolio – and currently yields 4.3%. 

Finally, to hedge against inflation, invest in Treasury inflation-protected securities (TIPS), which pay a fixed rate on principal that adjusts with inflation. Buy directly from Uncle Sam at TreasuryDirect.gov. Or consider a fund. The Vanguard Short-Term Inflation-Protected Securities ETF (VTIP, $48, 0.04%) yields 1.8%; the SPDR Bloomberg 1-10 Year TIPS ETF (TIPX, $19, 0.15%) covers both short- and medium-term securities and yields 1.5%.

Cash. Gone are the days when sitting in cash was a liability. Cash accounts pay nearly 4% or more now. Most high-yield savings accounts yield 4.0% or nearly, including Capital One's 360 Performance Savings account. Six-month Treasuries recently yielded 5.5%. Buy individual short-term Treasuries and Series I savings bonds (which yield 4.3%) at TreasuryDirect.gov. Or invest in the iShares 1-3 Year Treasury Bond ETF (SHY, $82, 0.15%) or the Goldman Sachs Access Treasury 0-1 Yr ETF (GBIL, $100, 0.12%). Both funds yield more than 4.0%. 

Money market mutual funds recently yielded more than 5.0%. Vanguard beats everyone on expense ratio and yield in this category – specifically, the Vanguard Federal Money Market (VMFXX, 0.11%) and the Vanguard Cash Reserve Federal Money Market (VMRXX, 0.10%), both yielding just over 5.0%. 

Consider alternative investment strategies 

Stick with your plan, but understand it's okay to make incremental shifts in response to market conditions. Bond yields are higher, and so are stock valuations, says T. Rowe Price's Page. So he's slightly underweight in stocks relative to bonds, he says. By underweight, he means below the target stock allocation in any given portfolio. But, he adds, "we limit our tactical adjustments to plus or minus 10 percentage points" around the target allocation. "These aren't big adjustments." 

Similarly, the advisers at Altfest Personal Wealth Management have shifted their focus since late 2021 from short-term inflation-protected bonds to intermediate and longer-term Treasury debt to lock in higher yields. 

Asset classes can morph over time, too. Today, more than half the high-yield bond market is made up of double-B-rated debt, the highest-quality junk bonds, says Page. That's up considerably from 2008, when double-B bonds accounted for roughly one-third of the junk-bond market. That means the asset class is slightly higher in quality than in years past – so it is lower in risk – but investors should expect to earn lower yields on junk bonds relative to Treasuries than in the past. Emerging-market countries, too, are less tied to volatile commodity prices, Page adds. "That will affect how the asset class behaves" relative to its historical performance, he says. 

Perhaps the biggest lesson investors learned in 2022 is that portfolios could use a dose of alternative strategies, which tend to move independently from stock and bond markets. Some of these strategies posted double-digit-percentage returns in 2022. 

"It's a catch-all category," says Altfest's Kressner, that can include long-short funds, market-neutral funds and managed-futures strategies. Today, a growing number of these approaches are available in mutual funds for mom-and-pop investors. Among them, we like the Pimco Trends Managed Futures Strategy Fund (PQTAX, 1.87%) and the Boston Partners Global Long/Short Fund (BGRSX, 2.81%). We also like the Vanguard Market Neutral Fund (VMNFX, 1.83%).  Note that a $50,000 minimum investment is required.

Some advisers make a case for putting up to 20% of your portfolio in alternative-strategy funds, depending on your age, circumstances and risk tolerance – "especially today," says Dan Villalon, global cohead of AQR's portfolio solutions group, who cites expectations for low returns from stocks and bonds in the coming years and the greater level of uncertainty in the world. 

Ideally, you would trim from both your stock and bond allocations to add alternatives to your portfolio. But Villalon says many investors, especially those who want to maintain a certain level of risk in their portfolio, simply take from the bond side. Either way, Villalon recommends considering a fund that employs multiple alternative strategies. Check out the AQR Diversifying Strategies (QDSNX, 1.72%). The fund proved to be a good diversifier in 2022, when it returned 14.5%. 

At Altfest, alternative asset strategies include a hodgepodge of approaches, including hedged-equity ETFs that offer some protection against stock downturns in exchange for a cap on potential gains. These so-called buffered or defined-outcome ETFs take some explaining. To limit losses and gains, the ETFs invest in options linked to, say, the S&P 500. Fund firms Innovator, Allianz and Trueshares have the longest track record with these strategies. We'll be watching them closely. 

Hire a professional adviser

Enlisting an expert to manage your portfolio is a good idea for many investors, especially those with complex financial situations. For others, a sit-down with an adviser – to assess whether you're on track with your investment goals – can offer peace of mind, which will help you stick with the plan. A robo adviser is a good option for many, too. You can also access professional expertise without hiring an adviser by buying shares in a fund that holds stocks and bonds, such as a balanced fund, or invest in a target-date fund. 

Balanced funds typically hold 60% of assets in stocks and 40% in bonds, a common allocation for an investor with a medium- to long-term time horizon and a moderate amount of risk tolerance. Actively managed funds tend to outshine ETFs in this category. Our favorite is the Vanguard Wellington (VWELX, 0.25%) because it has delivered solid, consistent returns and boasts a low annual expense ratio. The Fidelity Puritan (FPURX, 0.50%), American Funds American Balanced (BALFX, 0.62%) and Dodge & Cox Balanced (DODBX, 0.52%) are worth a look, too. 

Target-date funds grow old with you. Experts decide how to allocate your assets over your working life (and often well into your retired life, too) by gradually shifting the mix of stocks and bonds as you grow older. These funds are standard offerings in 401(k)s, but you can invest in one outside of your plan. 

Choose a target-date series that matches your tolerance for risk. Some are more aggressive than others. The funds in the T. Rowe Price Retirement and Fidelity Freedom target-date series consistently hold more stocks along their glide path (the shift in the stock-bond allocation over time) than peer funds do. The American Funds Target Date Retirement series follows a glide path that starts conservatively relative to peers but ends moderately aggressive. The T. Rowe Price Target series – which is more conservatively positioned than the firm's Retirement series – have lower exposure to stocks compared with peers. 

Index-based target-date funds get the job done, too. The Vanguard Target Retirement series shines here for its simplicity—the target funds hold a handful of broad-market index funds—and a low expense ratio of 0.08%. No other series comes close.

Use online tools to identify identify risk tolerance

Online tools can help you identify – roughly – your tolerance for risk. Bear in mind that your mood and/or market conditions may affect how you answer certain questions. 

Charles Schwab's questionnaire is open to all; you don't have to be a Schwab client to access it. Your answers will inform a time-horizon score and a risk-tolerance score that together slot you into one of five profiles: conservative; moderately conservative; moderate; moderately aggressive; or aggressive. 

Vanguard has a free tool, too. It will suggest a stock/bond/cash mix.

Robo advisers can be good sources for model portfolios, even if you don't have an account. Check out Schwab Intelligent Portfolios; E*Trade's Core Portfolios and Fidelity Go. You fill out a questionnaire about your age, time horizon and risk tolerance, among other things, and are shown a breakdown of how much to hold in stocks, bonds and other assets. Schwab and Fidelity even show what funds you'd hold if you opened an advisory account with them.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Many of the office buildings are named after daring British ships that defeated larger enemies in the 18th and 19th centuries. Front and center is a statue of Vanguard’s founder, the late Jack Bogle, who is credited with leading a financial revolution by popularizing index funds and driving down investing costs to effectively transfer billions of dollars from Wall Street to Main Street investors. 

In its 48-year history, Vanguard deployed its squeaky-clean reputation and rock-bottom money management fees to attract more than one out of every four dollars invested in funds — approximately $7.6 trillion — blowing past longer-established fund companies. Even last year, as investors pulled a combined $370 billion out of funds overall, Vanguard bucked the trend and netted nearly $83 billion in inflows, according to data from fund-tracker Morningstar. Only BlackRock notched more net gains. 

Now, the competitive landscape is changing, and Vanguard may once again be in the role of underdog. A growing number of competitors are taking aim directly at its bread-and-butter business by undercutting Vanguard’s fees. Some have even eliminated their fees altogether. With little room left to maneuver on fund-management fees, Vanguard is pivoting to compete on terrain it has long struggled with: providing more and better low-cost customer services, particularly in the realm of investment advice.

Vanguard executives say they are confident they are embarking on another financial revolution—one that could dwarf the impact of their low fees. “We democratized the fund business. And now there’s a huge opportunity in financial advice. We can provide better client outcomes by driving down the price of valuable advice,” says Joel Dickson, who oversees advice methodology for all of Vanguard. 

Some analysts and longtime customers worry that Vanguard may have trouble winning this next round, however. It has focused so much on fund management and cost-cutting, it has long underinvested in the kinds of technology and customer service systems needed to serve 21st century investors. Vanguard customers have complained about slow, inconvenient service and clunky technology for years. Alec Lucas, Morningstar’s lead Vanguard analyst, calls the firm the “Aldi” of money managers, likening it to the discount grocery chain that is beloved by bargain shoppers but offers bare-bones service.

The experience of one prominent Vanguard customer illustrates what the firm is up against. “I love Vanguard’s index funds. I am a ‘Boglehead.’ I am their biggest fan. But they are a victim of their own success,” says Rob Berger, a retired attorney and author of Retire Before Mom & Dad. Berger used to hold almost all his money at Vanguard. 

Recently he moved about two-thirds of his savings to another brokerage because it offered more-responsive phone service and more-robust apps and web services. Though he holds some Vanguard funds in the new account, he has also invested in the new firm’s low-cost funds. “Vanguard has to get their act together,” he says. 

A look back at Vanguard

At the outset, Vanguard took some daring and, in retrospect, wildly successful risks — on an unusual corporate structure, a new kind of investment, and a profit-slashing price war. Perhaps the most important yet least appreciated of these decisions was to structure Vanguard as a mutual company. That means it is owned not by stockholders or an individual, but is investor-owned, meaning fund shareholders own the funds, which in turn own the parent company. 

Bogle argued this freed Vanguard from the conflicts of interest that plagued its competitors, who were expected to return big profits to their owners, often at the expense of their customers. It also enabled Vanguard to avoid the bubbles and scandals that have made many investors cynical about Wall Street. 

Bogle’s 1976 launching of the first retail index fund got much more attention. The Vanguard 500 simply passively tracked the S&P 500 index. Every other retail mutual fund at that time was run by a professional manager who chose stocks for the fund, trying to beat the market. Competitors criticized the index fund as “un-American.” Today, index funds hold a majority of fund assets. 

The Vanguard effect

Vanguard’s third crucial strategy was sparking a fund-management-fee price war. Fund sponsors generally make their money by deducting expenses from investors’ portfolios (calculated as a percentage of assets, known as the expense ratio). When Vanguard launched in 1975, the average fund subtracted about three-fourths of a percentage point from an investor’s portfolio annually. Because it didn’t have to worry about funneling customer cash to owners, Vanguard chipped away at its expense ratio so that today its investors pay an average fee of just 0.08%, or a 12th of a penny for every dollar invested. 

What’s more, Vanguard raises the returns on its funds with the interest it earns on lending securities to other brokerages or short sellers. For example, the fees from securities borrowers added 0.02% to the return of its Total Stock Market Index Fund, offsetting most of that fund’s 0.03% expense ratio. 

Those strategies have forced competitors to offer better deals to their customers, says Morningstar’s Lucas. “The Vanguard Effect is real,” he says. Vanguard customers collectively get to keep at least $26 billion a year more than they would if the company charged the industry’s average expense ratio of 0.47%, Lucas calculates. 

Despite its bold history, Vanguard is extremely cautious in many other aspects of its operations. That has helped the company build a stable of top-notch funds and saved it from some fiascos — but it has also meant sometimes playing catch-up as the investment market has evolved. Vanguard has been slow to add new funds, for example. Dan Reyes, who heads Vanguard’s portfolio review department, says his team takes months, and often years, to study the advisability of a potential new fund. “We have a pretty high hurdle. We are looking for a product that will meet investors’ needs for a decade,” he says. 

That high hurdle has helped Vanguard avoid risky niche offerings, such as leveraged funds, which use debt and derivatives to amplify gains (and losses, too). And it has ensured that the firm remains extremely picky about the fund managers it hires. Many of Vanguard’s actively managed funds are run by subadvisers, such as Wellington Management, Primecap Management and Britain’s Baillie Gifford. Of the 50 Vanguard active funds rated by Morningstar, 48 are “medalists,” rated Gold, Silver or Bronze. “No one comes close to Vanguard” for affordable, well-managed active funds, says Jeff DeMaso, editor of The Independent Vanguard Adviser newsletter. 

Missed opportunites

An overabundance of caution has sometimes made Vanguard slow to adapt to important investing trends. In 1996, it dismissed a proposal to launch a new kind of investment called an exchange-traded fund. It wasn’t until 2001, when competitors’ ETFs had proved their staying power, that Vanguard joined in. It didn’t join the robo-adviser niche, which was launched by competitors in 2008, until 2020. 

And the firm meant to empower mom-and-pop investors has stinted on customer service. In his books, Bogle, who passed away in 2019, acknowledged that customers had complained about poor service for years. Until recently, for example, Vanguard’s solution to a rush of phone calls wasn’t to hire more customer service representatives but to dragoon all employees into a “Swiss Army” of call answerers.

But that penny-pinching has sparked widespread complaints. Bogleheads.org, an independent site where Bogle fans swap ideas, features a thread on Vanguard customer service with more than 1,000 comments. Not all are negative, but there are some common complaints: Vanguard hasn’t followed Schwab and Fidelity in offering night and weekend phone service; when phone lines are open, callers can spend hours on hold; and it can take weeks of back-and-forth to accomplish simple tasks, such as transferring money. 

Berger, the avowed Boglehead, whose YouTube videos on investing get tens of thousands of views, documented his effort to start a Vanguard robo-adviser account in the spring of 2022. He said it took 10 days for Vanguard to register his $3,000 deposit, and then he reported that the website wouldn’t load correctly, failing to show his progress toward savings goals. 

In a podcast interview conducted earlier this year by Barry Ritholtz, chief investment officer of Ritholtz Wealth Management, Vanguard CEO Mortimer “Tim” Buckley acknowledged that internal gauges in previous years showed customer satisfaction “declining because of an antiquated digital experience.” 

Better customer relations

So, Vanguard has been racing to improve its customer service. The company launched a new mobile phone app in 2022 — to blistering reviews. “Our clients hated the mobile app,” Buckley said in his interview with Ritholtz. The tech team kept tinkering with it, issuing 200 updates in nine months, he said. Morningstar’s Lucas says Vanguard is about two-thirds of the way through a massive technology upgrade aimed at improving customers’ online experience. 

As a result of efforts to improve interactions with individual investors, “from redesigned web and mobile experiences to additional investments in our client-facing call functions,” says a Vanguard spokesperson, internal research and customer feedback surveys show a 30% increase in client satisfaction with the website and a 10% improvement in services such as hold times or how long it takes to get to the right person. 

And the fund company is full steam ahead on its evolution into a more diversified financial services firm. Vanguard is rapidly upgrading its advice business in the belief that providing financial planning and coaching can have profound impacts on clients’ long-term financial security, says Vanguard’s Dickson. The firm’s Personal Advisor service charges 0.3% of assets for access to human advisers. Customers need a minimum balance of $50,000. Those with at least $500,000 get a personal certified financial planner. The firm’s robo-adviser service, Digital Advisor, charges 0.15% and requires a minimum investment of just $3,000. Both advisory fees are on top of fund expenses.

Each of the advisory services starts with a basic portfolio of four index funds, providing exposure to U.S. and international stocks and bonds. Vanguard is adding more options, such as actively managed funds and funds that stress environmental, social or governance issues. To make its advisory services more attractive, Vanguard has started offering those customers exclusive access to specially curated versions of some of its best active funds. Advisory clients can also get into some popular funds that are otherwise closed to new investors. 

Vanguard also now offers automatic tax-loss-harvesting in both of its advice options. And other services will be coming soon. Brian Concannon, head of Vanguard Digital Advisor, says the company expects to roll out additional services this year to help retirees calculate and automate tax-efficient withdrawals from their retirement accounts. 

Looking to the future

Vanguard is facing a tricky challenge of defending its core business while also racing to catch up with consumers’ evolving expectations. But it’s far from on the ropes. Morningstar last year called Vanguard’s advice programs the best overall in the industry because of their low costs, services such as goal-planning tools, and portfolio construction. Kiplinger readers gave Vanguard “above average” ratings for its customer service and advice programs this spring. Vanguard also ranked at the top for do-it-yourself investors in a recent J.D. Power survey. 

And the core business? As Vanguard approaches its 50th birthday and prepares for the next 50 years, CEO Buckley has vowed to keep paring fund-management fees. If the net positive inflows so far this year are any indication, the business of managing investors’ money through mutual funds and ETFs for now appears to be beating back the competition.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The broad U.S. market, measured by the S&P 500 Index, notched 47 new highs over the course of the calendar year through October, to the surprise of many investors who watched from the sidelines with huge cash positions, and to the chagrin of many Wall Street experts, who had to boost their year-end forecasts for the benchmark throughout the year – some, multiple times.

"We got stampeded by the market. There are hoof marks on our backs," says strategist Ed Yardeni, of Yardeni Research, who began 2024 with one of the highest targets on Wall Street, then raised it in June. The index closed at 5,705 on October 31, the date for prices, returns and other data in this story. That's a price gain of 36% over the 12 months since our last outlook.

The powerful rally has pushed stock valuations close to red-flag territory for many market watchers, with the S&P 500 trading at nearly 22 times expected earnings for the coming 12 months – above its five-year average of 19.6 and 10-year average of 18.1. "There's no way to sugarcoat it: The S&P 500 is statistically expensive," writes BofA Securities strategist Savita Subramanian in a recent research note.

But it's not as if this high-altitude market is headed off a cliff, with nowhere to go but down. Solid supports include a robust economy, with recent reports coming in strong and some earlier ones revised upward. The base case on Wall Street is now for a soft landing – an economic cooling without a recession – or even no landing. Couple that with interest rate cuts from the Federal Reserve, and you've got what some of the most optimistic bulls are calling a "Softilocks" situation: the soft-landing version of a "just right" macroeconomic scenario.

Make no mistake, however, 2025 will be a test for the market and investors. Those high valuations are a hurdle. And those rosy economic reports have come with a back-up in bond yields at the longer, inflation-sensitive end of the spectrum. So-called bond vigilantes have pushed yields higher on worries that inflation will continue to smolder, hence rate cuts won't be as deep or as frequent as hoped while the Fed walks a tightrope between keeping a lid on prices and supporting job growth.

Geopolitics is a huge wildcard for stocks, with an ongoing war in Ukraine and escalating conflict in the Middle East. And the U.S. must navigate a new political regime after a hard-fought election.

Moreover, history cautions against too much bullishness now, given the typically measured gains in the third year of a bull market (this one just turned two in October). The 11 bull markets since 1947 that celebrated a second birthday went on to produce an average return of just 2.0% in the 12 months after, according to Sam Stovall, chief investment strategist at CFRA, an investment research firm. All third-years saw a pullback of at least 5%; three succumbed to a new bear market and three posted double-digit gains.

We have a rosy outlook for stocks in 2025

We see another positive year for stocks in 2025, especially in the U.S., with the S&P landing somewhere between 6,300 and 6,600. That represents a 10% to 16% price gain from the benchmark's close on October 31, and dividends could add another 1 to 1.5 percentage points.

The U.S. should continue to lead global markets, with corporate earnings continuing to grow and, better yet, broaden, supporting a rally that spreads beyond the so-called Magnificent Seven tech giants to the other 493 stocks in the S&P 500 and to other overlooked corners of the market.

Acknowledging the many risks, however, and the likelihood of a market correction at some point along the way, we caution investors to be selective and to keep portfolios diversified, rebalancing periodically to ensure they stay that way.

A note on the recent U.S. election: Don't overhaul your portfolio based on the results. At the margins, financial and energy stocks, for example, could enjoy a more favorable regulatory regime under a Trump administration, says Solita Marcelli, Chief Investment Officer Americas, UBS Global Wealth Management. But "we always remind clients that our sector views are primarily driven by macroeconomic factors and corporate earnings, not so much by politics."

The Benjamin Button economy

Think of a soft- or no-landing economy as one moving backward in time, says Jared Franz, an economist with Capital Group. Instead of moving through the four stages of the business cycle in order, ending in recession, we're moving from a late-stage economy (characterized by rising cost pressures, central bank tightening and contracting corporate profit margins) back to a mid-stage one (characterized by peak profit margins, a pickup in credit demand and improving employment).

Going back to 1973, Capital Group research shows that mid-cycle economies have tended to produce annualized stock returns in the mid-teen percentages. "If the economy continues to grow at a healthy rate, it should provide a nice tailwind for stocks," says Franz.

Recent indicators have been promising. In late October, the government reported that gross domestic product (GDP) grew at an annual rate of 2.8% in the third quarter, on top of 3.0% in the second quarter. Strong consumer spending on both goods and services powered much of the gain. The Fed's preferred inflation gauge inched closer to the central bank's 2% target. And although the most recent report showed a stagnation in job growth, poor weather and labor strikes got much of the blame, and the unemployment rate remained low, at 4.1%.

Kiplinger's forecast calls for the economy to grow at an average rate of 2.3% in 2025, following 2.7% in 2024, with inflation averaging 2.4% in 2025, down from an average rate of 2.9% expected for 2024. To put that in a global context, the International Monetary Fund in October raised its forecast for U.S. economic growth to 2.8% for 2024 and 2.2% in 2025, up from its July outlook, making the U.S. the only developed economy to see upward revisions for both years.

Against this backdrop, betting on healthy consumer spending makes sense. CFRA analysts recommend both Airbnb (ABNB) and Six Flags Entertainment (FUN).

A low-rate playbook

A central bank rate-cutting cycle, even a modest one, that unfolds without an associated recession is a rarity – and a boon to the stock market (see the table below). Since 1984, according to Capital Group, when that lucky combination has occurred, from the first rate cut to the last, nearly every stock sector has logged double-digit-percentage gains.