I remember when the top mutual fund, and the best investment some investors ever made, returned 144% in one year. That same fund won’t be the top mutual fund for 2015 because it doesn’t exist today, although similar ones do. And none of them will likely be your best investment for 2015, either. Here’s what you need to know.
The top mutual fund in any given year is also likely to be the average investor’s best investment, because most investors don’t actively play the markets. Funds are the domain of the average investor, and justifiably so. They are designed for people who don’t have the time, experience or desire to sift through the thousands and thousands of alternatives available to them in the investment universe. At the same time, there are things you must be aware of when you place your money in the hands of these professional money managers.
When the economy, as well as corporate sales and profits, are healthy and growing the top mutual fund (the one with the highest total return for the year) is more than likely one that invests in stocks (also called equities). How did the one I refer to get a return of 144% in just one year? First, it was a good year for the market. Second, they invested in aggressive growth stocks. Third, they employed financial leverage. Why did I suggest that a similar one is not likely to be your best investment for 2015 and what is financial leverage?
Financial leverage was a catalyst for the great depression as well as for the financial crisis of 2008. Financial leverage: you increase your return by borrowing money so you have more to invest with. Example: If you have $100,000 you can buy $200,000 worth of stock “on margin”, and will owe your broker $100,000. This 2 to 1 leverage doubles your return because you can buy twice as much stock. The bad news: you can also lose twice as much, plus interest. In other words, this top mutual fund from the past may have been the best investment, but it involved a lot of risk for the investor.
The real bad news is that MUCH HIGHER leverage can and has been employed by the big players. When the markets make a big move against them, their house of cards (debt that must be covered) comes crashing down. Taken to extremes this can create a financial crisis.
Now let’s look at the other two factors I mentioned in respect to the top mutual fund for 2015: the stock market and growth stocks. In a good (up) market growth stocks and funds that invest in them tend to outperform, but in a bad market (down market) they tend to get hit harder. Hence, one of them could be your best investment for 2015, especially if it uses financial leverage. Or it could be one of the biggest losers – like the one I originally referred to turned out to be the following year.
The economic outlook and the stock market’s general trend have a heavy influence on what will be the top mutual fund for 2015 in terms of performance and total return. For example, the stock market has been going up since the end of the financial crisis of 2008. Where might you find the best investment for 2015 in the world of mutual funds IF the market tanks?
Actually, you have more choices than you might think you do. Some funds specialize in areas or sectors like energy and oil stocks or gold stocks. In a bad market these sectors can swim against the tide. For example, as I write this the stock market is near its all-time high. Gold is down several hundred dollars from its all-time high, and oil prices are falling like a rock. One of these sector funds could be an opportunity and the top mutual fund for 2015 and beyond.
Taking it a step further, what if we truly have a real bad stock market in 2015 and beyond? Some funds actually “short” the market, betting that stock prices will fall. And some (called inverse ETFs, or exchange traded funds) do it with financial leverage of 2 or 3 to 1. Obviously these are risky, are not for everyone. But if things really unravel, one of them could be the best investment for 2015, in terms of performance and total return.
Many of today’s investors don’t understand that the past few years have been unusual, to say the least. The stock market has continued to go up with little volatility for almost six years, while interest rates have fallen to record lows. Trends don’t last forever. When the above trends change last year’s top mutual fund and best investment will not be repeat performers. And remember, your best investment for 2015 and beyond is one that fits your comfort level for risk.