We received a phone call on the radio show Sunday from a young woman looking at the Franklin NY Tax free fund as an alternative to a 5 year CD. She knew that it was a loaded fund and had returned roughly 3% over the past ten years. She knew that she wanted a better return on her money than the CD and that she did not want a complicated investment.
This is no critique of the Franklin fund or the woman who called. Many times investors can’t verbalize what they want but are more comfortable telling us what they don’t want. Frequently what investors want — THEY CAN’T HAVE. For example, an investor might want little principal risk, 7% ( or more) and immediate access to their funds. Short of Bernie Madoff, that ain’t happening. Investing frequently involves compromising absolutes– I am willing to take some risk with the potential for that elusive 7% return.
This is a timeframe where the past performance numbers are attractive and likely to get even more so as the brutal year 2008 will soon be out of a 10 year trailing return. It is imperative for investors to consider historical returns on stock and bond funds rather than simple trailing returns. It is also important to revisit what a fund did in 2008 as a possibility (note we write possibility not probability) Also it is impossible to imagine forward performance of fixed income funds equalling their past performance with the 10 year treasury at or near historical lows.
Our advice continues to be “stay diversified” – while bonds remain historically overvalued their best bet for solid performance would be some type of stock market pullback. “Focus on the longer term”- the constant negativity of the financial world has kept many growth investors sidelined since 2008. That has been a very bad place for them to be.
Investments should not be a destination rather a way station. The old UBS commercial where the investor had a number (supposedly his retirement number ) with him or her all the time was spooky. The investor seemed imprisoned and anchored down by that number. Frequently we find investors transfixed by saving and accumulating with no idea of why and what they hope their 401k will do for them.
Life is short– money is fleeting. Allow your money to make your life better now and also in the future. Investments can deliver numerical results and build statistical wealth but the investor must harness those numbers to make their life what they envision it to be.
Getting back to our caller, we suggested mutual funds in both the stock and fixed income categories thinking that would provide returns with some risk over time. The diversification would also provide some flexibility should that investor need a piece of their account unexpectedly. We chose taxable bond funds as she was not in a high tax bracket with an emphasis on stock funds/etfs as she was a younger investor.