Investment Basics

Yesterday's best investment portfolio might not be the best investment strategy for most folks in 2011 and beyond. For the past decade bond funds were the best investment vs. stock funds. Going forward your portfolio might need a few adjustments to keep you out of trouble.

For many years mutual funds have been the average investor's best investment vehicle, and a simple portfolio formula has worked quite well. Diversifying with a bit over 50% in diversified stock funds and 40% or so in bond funds has worked to keep the average investment portfolio out of serious trouble leading up to 2011. But this might not be your best investment portfolio going forward. In the past decade diversified stock funds have struggled while bond funds were steady performers. As a result investors large and small have loaded up on bonds and the funds that invest in them. Before 2011 turns to 2012 a change of fortune could be in the cards.

Investment trends leading into 2011 included higher prices for stocks, oil, gas, gold, silver and other commodities. And late in 2011 longer-term interest rates headed upward, which sent bond prices down. If such trends continue and inflation heats up, the best investment portfolio going forward will NOT be one that's heavy into bond funds (also called income funds). Simply put, when inflation and interest rates heat up bond funds lose value. Your best investment strategy here is to cut back on these funds if you have significant exposure. Favor short-term and intermediate bond funds and sell or avoid long-term funds. The latter can get hit hard when interest rates and inflation go up.

In the stock (equity) fund arena, broaden your horizons. Most people rely heavily on general diversified stock funds that invest primarily in domestic (U.S.) stocks. Your best investment strategy here is to include international funds in your portfolio for world-wide diversification. Then consider non-diversified specialty funds that specialize by holding stocks in these sectors: energy or natural resources like oil... real estate... basic materials like copper and aluminum. Although gold funds have been one of the best investment options going into 2011 - if you missed gold's big move don't chase gold at $1400 an ounce or more.

The best investment portfolio for 2011 and beyond will also include the only funds that are really safe investments: money market funds. These pay interest in the form of dividends with a share price pegged at $1. If interest rates and inflation go up these funds should hold their value AND pay increasingly higher dividend yields. Money funds, unlike bond funds, benefit when interest rates rise.

Keep in mind that interest rates and inflation had been low and/or falling for many years heading into 2011. This has kept bond prices rising, because the FIXED interest income bonds pay has looked increasing attractive to investors. That's the real reason millions of investors still see bond funds as their best investment. If trends reverse your best investment portfolio will be one that's conservative in the bond funds department... more broadly diversified in stock funds... with money market funds for safety.

What if you make these changes to your investment portfolio and trends don't change? You'll still have a broadly diversified portfolio for 2011 and beyond that's balanced across the asset classes. And your best investment portfolio over the long term is always one that is well diversified and balanced.

Author and former financial planner James Leitz brings 40 years of investing experience to readers in his complete investing guide for beginners, INVEST INFORMED. Learn how to invest starting with investment basics in plain simple English. To get up to speed on both investments and investing money for 2011 and beyond visit Jim at http://www.investinformed.com now.