Best Mutual Funds for 2013 and 2014 – Stock Vs Bond Funds
By James Leitz
In the years leading up to 2013 and 2014… most investors bought into the concept that the best mutual funds, stock funds vs. bond funds, were bond funds. They were viewed as the best mutual funds because they had consistently performed well with less risk. The question now is: will they continue to outperform over the long term as the best investment in 2013, 2014, and beyond?
Just for the record, bond funds have actually outperformed over the past 30 years; and over the past dozen years they have clearly been the best mutual funds, and perhaps the very best investment for the average investor. When investing for 2013, 2014 and beyond the stock funds vs. bond funds debate SHOULD BE on your mind. After all, these are traditionally the two best investment options for average investors who want growth and income, and are where most investors put their money.
Strange as it may seem, between early 2009 and mid 2012 the stock market doubled in value while investors were dumping equity or stock funds (that invest in and hold equities, stocks) and buying bond funds (that hold fixed-income long term debt securities, bonds). In other words, they were selling the best mutual funds (performance-wise) and buying what they had become most comfortable with: shares of professionally managed portfolios of long-term fixed income debt securities called bond funds.
It’s time to get a handle on the risk factor vs. profit potential of these two investment options. Long-term debt securities, even U.S. Treasuries, are not safe investments today. They fluctuate in price and trade in the open market just like equities do. When interest rates fall the fixed income they pay becomes more attractive to investors, who bid up the price of these securities. Interest rates have basically fallen for 30 years and have reached extremely low levels. With interest rates falling from double digits to record low levels over the years, bond funds vs. stock funds have been the best mutual funds. They have paid higher dividends from the interest they earn AND have gone up in price, value.
Since the beginning of the year 2000, stock funds vs. bond funds have paid much lower dividends, AND have experienced heavy losses in TWO severe bear (down) markets. Average investors have lost confidence in equities, and now many consider the stock market too risky. In deciding which are the best mutual funds and your best investment for 2013 and 2014 keep this in mind: both have significant risk going forward.
On the other hand, only one of these investment options has the potential for high returns, while the other has limited prospects for gaining significantly in value – plus plenty of downside risk. If the interest rate trend turns around and rates rise significantly, fixed income debt securities WILL be losers and WILL be BIG LOSERS if interest rates go up big time. They can’t be big winners if rates continue to fall… because interest rates are already ridiculously LOW and can’t fall much further. Equities or the stock market is a more difficult call, but generally speaking when money leaves the debt securities market some of it flows to equities which tends to support stock prices. That’s the advantage of stock funds vs. bond funds as the best mutual funds going forward. They have upside potential, while bond fund returns are limited.
Interest rates in this lackluster economy of ours will tell the tale. Our Federal Reserve has made it clear that they INTEND to keep rates low until the economy and unemployment rate improve. What if the independent rating agencies (Standard & Poor’s, Moody’s, and Fitch) lower their credit rating for USA debt securities again and continue to warn investors? What if China and/or Japan (who both own over $1 trillion of our debt securities) announce that they have lost faith in our financial system, and start selling our debt in the open market? Interest rates would soar, sending bond prices and funds into a tailspin. Score one point for stock funds vs. bond funds as the best funds for 2013, 2014.
Now let me simplify for you. In the bond funds vs. stock funds debate do not assume that the former are the best mutual funds, or your safer or best investment for 2013, 2014, and beyond. Frankly, I’m not alone in my viewpoint: America and much of the world is anemic and drowning in debt. We can’t artificially keep interest rates at ridiculously low levels forever. When the lid comes off and interest rates blast off: bond funds will not be the best mutual funds and will not be your best investment. Take a look at specialty equity funds that specialize in areas like gold, real estate and natural resources like oil. If IT hits the fan, these could be the best mutual funds.