"I currently have $54,000 in [certificate of deposit] IRAs from a lump sum and annual contributions," a Dallas woman writes. "I recently received a $10,280 distribution from a 401(k) plan and have 60 days to roll it over.
"Please explain how I can invest for five to 10 years in a no-load growth fund since the rest of my IRAs are so conservative. Am confused as to whether at my age (50) I should invest the total sum in one fund or several."
Good question -- maybe similar to one you've been asking yourself. Of course, CDs, which provide safety of principal and income at 2 or 3 percentage points above the inflation rate, may be appropriate for a portion of your IRA portfolio.
But even when compounded tax-free in an IRA prior to your taking distributions, their income is likely to produce returns well below those of the average, well-managed equity fund.
In the last five years, for example, a $5,000 investment in the stocks making up the Standard & Poor's 500 Index would have grown to $9,926, a 14.7 percent annual return, according to the Vanguard Group. A similar amount in a five-year, 8 percent CD would have grown to $7,430, for an 8.2 percent annual return. (More than 100 funds did better than the S&P 500.)
If you plan to be invested five to 10 years -- long enough to ride out fluctuations in the stock market -- it makes sense to allocate part of your nest egg to one or more funds that could beat CDs significantly.
But one fund or more than one?
If we knew which fund would be the best performer over the next five to 10 years, the answer would be easy. We don't. Nobody does. Nor can anyone predict whether growth funds or other categories will do best.
Over the last five years, growth funds, as classified by Lipper Analytical Services, led all general equity fund categories in performance -- including the more aggressive capital appreciation group -- with a 12.3 percent average annual total return. But over the last 10 years, growth and income funds excelled, with an average annual return of 15.6 percent (half a percentage point ahead of growth funds).
Who can be sure that during the next five to 10 years it won't be another group, such as small-company growth funds?
Under the circumstances, dividing money between two -- possibly among three -- funds, each following a different strategy, would seem to be a reasonable approach. You wouldn't be betting all on one fund's portfolio manager and its set of investment objectives.
Let's assume you choose three funds. You might divide your money and invest an equal amount in each. Or you might designate one fund as the portfolio's core, investing half in it and quarters in the other two.
Your decision depends on how comfortable you are with the expected volatility of each fund. It shouldn't depend on requirements for minimum initial investments, since these are often only $1,000 or $500, or even less, for IRAs.
One could be a fund, invested for growth, that stays essentially fully invested in stocks and may be a bit volatile -- such as Twentieth Century Ultra or Twentieth Century Growth.
Or it could be the Vanguard Index Trust 500 Portfolio, a growth and income fund managed to match the price and yield performance of the S&P 500 Index. Since the index is generally regarded as the benchmark for the U.S. stock market's performance and the fund is invested in all 500 companies in about the same proportions as they're represented in the index, this fund performs as well as "the market" (less a tiny 0.2 percent in annual expenses).
A second investment could be in a growth or capital appreciation fund whose manager accumulates cash reserves by selling stocks or not investing fresh money from shareholders or dividends when he feels stock prices are too high. The manager feeds cash into the market again when he finds stocks that sell at attractive prices. Two such funds: Janus Fund and Janus Twenty.
A third choice could be a fund concentrated in the stocks of small companies, which tend to behave differently from those of large companies. For seemingly endless stretches, small-company stocks can lag the blue chips. Then comes a period, as happened this year, during which they set the pace. A top performer in this category: Scudder Development.
Once you're invested -- whether in these or in other funds -- monitor them to determine whether they give you the kind of performance you expect. Read their reports to shareholders to understand why they performed as they did.
As you become familiar with their behavior, you may decide to revise your allocations, switching funds to reduce or raise the riskiness -- and expected returns -- of your portfolio.