How to Invest Smart in 2011 and Beyond

Think of how to invest and where to invest in 2011 and going into the future as an ongoing process - not as a one-shot project. You'll want to invest with diversification and flexibility on your side, and be prepared to change how you invest over time. It's not that difficult to get a handle on, especially the where to invest part.

I started in the investment business 38 years ago and have since retired from the financial planning field. I've never had a problem giving free advice on where to invest, even when asked in casual conversation. How to invest is another matter and that question deserves more attention. The problem there is a matter of timing. Today's good advice is often bad advice a year or so later. Such is the case for 2011 and beyond.

The average investor simply can not invest in a handful of random investments, ignore them, and expect to do well in 2011 and going forward. With the state of the financial world it's not that simple. So, let's make it as simple as possible. How and where can you invest through 2011 and beyond to make the best of it and stay out of big trouble if things go wrong?

Where to invest: 98% of you should invest with one (or more) of the large well-established mutual fund companies (families). They offer all of the investment options you'll ever need, all in one place. These companies offer money market, bond, and stock funds which represent the three major asset classes of investment. They do the money management in the form of diversified portfolios, commonly at a cost of 1% to 2% a year for expenses. Some also involve sales charges or "loads" and others don't. You simply decide which funds to invest in and how much to invest in each.

The biggest and best fund companies include Vanguard, Fidelity, T Rowe Price and American Funds. To avoid sales charges and invest on your own I suggest going with any of the first three. If you prefer to work with an adviser or financial planner and pay some form of sales charges consider American or Fidelity (Fidelity works both ways).

How to invest smart and stay out of trouble is the real challenge for 2011 and beyond. How much should you invest in the different fund types and which funds within each basic type should you invest in? Here's an example of how to invest if you are moderately conservative and want to keep risk under control. Invest equal amounts in a money market fund, a bond fund, and a stock fund. Go with the fund company's largest money market fund, and an intermediate-term high quality bond fund. Choose a large diversified equity-income stock fund that will invest your money in large-company stocks and pay about a 2% dividend yield.

Now you are diversified across the asset classes with flexibility. You can always move money from one fund to another... which is what you will want to do in the future. This will not be a taxable transaction IF you are in a tax-favored account like an IRA. How to invest now becomes an ongoing process called REBALANCING your portfolio of funds.

Once a year check the value of your funds to see if they are still close to equal in value. If they are not you need to move money around to bring them back into line. For example, your riskiest fund is your stock fund and it is the one with the greatest profit potential as well. If the stock market has a particularly good or bad year you will need to move money. By simply keeping all three funds about equal in value you will automatically be pulling money out of your stock fund after a real good year. And you will be adding money to it after a bad year, when stock prices in general are lower.

The year 2011 and beyond is clouded with uncertainty: slow economic growth and high unemployment cloud the outlook for the stock market and stock funds. Super low interest rates make the miserly interest yield from safe money market funds less than attractive at the moment. Bond funds with their higher interest income could be ticking time bombs IF interest rates take off and soar. (Refer to articles on BOND BUBBLE). But, guess what? You need to invest to get ahead, and we've just covered the three basic investment alternatives available to all investors.

Don't invest with your head in the sand. Invest and diversify with mutual funds. That's been the best way for most investors to invest for the past 40 or 50 years. And it's still how to invest for 2011 and beyond. Diversification takes the guess work out of investing and helps you avoid getting into big financial trouble.