Investors also must understand that the safer an investment seems, the less income they can expect from the holding. Market timing seldom works. Trying to time the market by selling your stock funds before they lose money and using the proceeds to buy bond funds or other conservative investments and then doing the reverse to capture the profits when the stock market rises is a risky game to play.
The odds of making the right move are stacked against you. Even if you achieve success once, the odds of repeating that win over and over again throughout a lifetime of investing simply aren't in your favor. A far better strategy is to build a diversified mutual fund portfolio.
A properly constructed portfolio, including a mix of both stock and bonds funds, provides an opportunity to participate in stock market growth and cushions your portfolio when the stock market is in decline. Such a portfolio can be constructed by purchasing individual funds in proportions that match your desired asset allocation. Alternatively, you can do the entire job with a single fund by purchasing a mutual fund with "growth and income" or "balanced" in its name.
Several types of bond funds are particularly popular with risk-averse investors. Funds made up of U. Treasury bonds lead the pack, as they are considered to be one of the safest.
Investors face no credit risk because the government's ability to levy taxes and print money eliminates the risk of default and provides principal protection. Bond funds investing in mortgages securitized by the Government National Mortgage Association Ginnie Mae are also backed by the full faith and credit of the U. Most of the mortgages typically, mortgages for first-time homebuyers and low-income borrowers securitized as Ginnie Mae mortgage-backed securities MBS are those guaranteed by the Federal Housing Administration FHA , Veterans Affairs, or other federal housing agencies.
Options to consider include federal bond funds, municipal bond funds, taxable corporate funds, money market funds, dividend funds, utilities mutual funds, large-cap funds, and hedge funds. Next on the list are municipal bond funds. Issued by state and local governments, these investments leverage local taxing authority to provide a high degree of safety and security to investors.
They carry a greater risk than funds that invest in securities backed by the federal government but are still considered to be relatively safe. Taxable bond funds issued by corporations are also a consideration.
They offer higher yields than government-backed issues but carry significantly more risk. Choosing a fund that invests in high-quality bond issues will help lower your risk. While corporate bond funds are riskier than funds that only hold government-issued bonds, they are still less risky than stock funds. When it comes to avoiding recessions, bonds are certainly popular, but they aren't the only game in town.
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing. Instead, consider funds and stocks that pay dividends, or that invest in steadier, consumer staples stocks; in terms of asset classes, funds focused on large-cap stocks tend to be less risky than those focused on small-cap stocks, in general.
Contrary to popular belief, seeking shelter during tough times doesn't necessarily mean abandoning the stock market altogether. While investors stereotypically think of the stock market as a vehicle for growth, share price appreciation isn't the only game in town when it comes to making money in the stock market.
For example, mutual funds focused on dividends can provide strong returns with less volatility than funds that focus strictly on growth. Utilities-based mutual funds and funds investing in consumer staples are less aggressive stock fund strategies that tend to focus on investing in companies paying predictable dividends. Traditionally, funds investing in large-cap stocks tend to be less vulnerable than those in small-cap stocks, as larger companies are generally better positioned to endure tough times.
Shifting assets from funds investing in smaller, more aggressive companies to those that bet on blue chips provide a way to cushion your portfolio against market declines without fleeing the stock market altogether.
For wealthier individuals, investing a portion of your portfolio in hedge funds is one idea. Hedge funds are designed to make money regardless of market conditions. Investing in a foul weather fund is another idea, as these funds are specifically designed to make money when the markets are in decline. In both cases, these funds should only represent a small percentage of your total holdings. US stocks see 3rd-biggest outflow in history as investors flee tech. Matthew Fox. Technology stocks, which have led the market lower since the stock market hit record highs on September 2, suffered their biggest fund-flow redemption since June , according to Bank of America.
The September stock-market correction is part of a "topping process," but don't expect a big bearish move as the Federal Reserve continues to implement easy monetary policies, the firm said. Visit Business Insider's homepage for more stories. Let me offer a more straightforward explanation of why investors have left the stock market: it has been a losing proposition. Gross wrote. Gen X and Y believe in Facebook but not its stock.
Gen Z has no money. Gross, who manages the largest bond fund in the world, started a stock fund several years ago, too, so he has a vested interest in seeing stocks succeed for his clients. So why are so many investors sitting on their hands?
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