Expert: Paul Henneman - 10/5/2010

Question
I am in my mid 30s and just started the diversified portfolio thing through the mutual funds route by rothing it.  But as you know, the contribution is only limited to 5k per year.

Bank CDs are horrible now so this is my last resort option.  I have read about annuities and life insurance as retirement vehicles but NO WAY on those two.

With my remaining savings in the bank, any other ideas on what else I can do, options to look at in terms of growth?  The mutual funds are obviously for retirment money, and I want to build the remaining money in my savings for my retirement fund as well.  If nothing else, I will lock it in a short term bank CD.  So I wanted to get your input on this if there are other options to look at that I havent yet.

Thx.

Answer
Thank you for your question!
  Yes, I do have two suggestions for you that I think are worthy of your time to investigate.
  The first are ETF's (Exchange Traded Funds).  These offer essentially the same benefits to you as mutual funds, in each ETF represents a basket of stocks that you can buy and sell as a single ticker symbol.  The most popular ETF's are index ETF's, in that they track a specific index (as you may know there are mutual funds that do this as well).   ETF's typically have lower fees than Mutual funds, sometimes much lower.
  Something else to consider: Bonds.  Buying and selling individual bonds is a minefield, just like buying individual stocks. But, there are Bond mutual funds and bond ETF's that are much more diversified. Bonds are much more stable than stock based mutual funds or ETF's, but return less. However, bonds are typically considered an essential part of any portfolio.  They generally offer positive performance, even when stocks (and mutual funds or ETF's that are based on stocks) are falling, thereby reducing the overall volatility of your portfolio.
   You are right that returns currently on CD's are terrible. Bonds can offer several times higher returns, and while should not be considered risk free, do accomplish the goal of reducing the volatility of a portfolio. Most money managers advise all investors to have a significant percentage of their portfolio in bonds, and as they age and get closer to retirement, to further increase the percentage allocated to bonds. This is because bonds are less risky, and a terrible year or two of performance can really affect those investors closer to retirement. If retirement is 10 years or more away, then there is time for the portfolio to recover, so generally a lower percentage in bonds is recommended.
   I hope you look into it, and if you have any more questions please do not hesitate to follow up with me,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com