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Mutual Funds For 2013: The Devil And The Deep Blue Sea

This is the season when many people look over their investments and come to some conclusions about how well or poorly they have done in the year 2012. An obvious corollary of that process is that there is often a need to reallocate resources into areas that it is hoped will prove profitable in the upcoming year.

Since most people have enough in their lives to worry about already, they are not eager to shoulder the additional task of trying to guess the future of the financial markets. Even in the best of times, this is not a high percentage game for nonprofessionals. Given the current instability in markets everywhere, amateurs probably should not play with that particular pack of matches, which can easily end up torching their financial house if they are not used carefully. Far more than in more normal times, it is important to entrust one’s nest egg to a professional who has the times and resources to keep it safe and make it grow.

money graphIn almost all cases, people need to balance their portfolio in such a way that one or two bad stocks does not wipe them out. In other words, mutual funds that spread risk across large numbers of individual companies are really the best option. While picking such funds is not an exact science, taking a look at this past year’s top performers provides at least some tangible clue as to how competent, or lucky, the fund management is likely to be when it comes time to select mutual funds for 2013.

There is one additional piece of the investment puzzle that needs to be examined as well. Since mutual funds are at least reasonably dependent on general market conditions, those funds that offer the least amount of risk also yield the smallest amount of return. Given the generally miserable condition of world equity markets, only the higher risk funds are creating much of a return for their customers. Many of these funds are heavily allocated to unconventional segments of the market such as subprime bonds and various complex real estate assets. The best of these funds have turned in double digit gains in 2012, but the risk of investing in these same or similar mutual funds for 2013 entails a greater element of heightened risk than most investors are comfortable with.

When it comes to picking mutual funds for 2013, the next crop of stars are likely to be found in the same fund galaxies as the ones which did so well in 2012. This leaves investors faced with a serious choice between two mutually exclusive options. On the one hand, they can opt for safety and not make much, if anything, on their investment. On the other hand, they can put their money into so-called high yield funds, which is the sales description of high risk funds, and risk taking a significant beating if things go abruptly wrong.