For that reason, we set out to find the top-performing actively managed funds over the past 10 years in each of the nine stock fund style categories defined by Morningstar. The financial data firm divides funds into those focused on growth, value or a blend of the two, invested in large-, small- or midsize-company stocks. 

Our final list includes funds that employ a variety of strategies, which we highlight below. We didn’t originally intend to exclude index funds, but frankly, few rose to the top — except in the large-company growth category (which includes funds that track the Nasdaq 100 benchmark and so happen to be stuffed with the tech behemoths that have dominated the market lately). Given the slim showing, we decided to focus on actively managed U.S. stock fund winners. 

These aren’t the top performers in every category. We only considered funds that are open to new investors, require reasonable minimum initial investments and have had at least one manager in place for the entire decade. That eliminated some standout funds with newer managers, including Fidelity OTC, T. Rowe Price U.S. Equity Research and Parnassus Value Equity (formerly known as Parnassus Endeavor). 

Most of the funds have above-average expense ratios, and a few are load funds (but all are available with no transaction fee or sales charge from major brokerage platforms). It’s important to note that a place on this list does not equal a Kiplinger recommendation.

Still, funds that owned the decade deserve looking into. Read on to learn more about the winners, listed in alphabetical order within their fund categories. All data and returns are through May 31, unless otherwise noted. 

Large-company stock funds

Fidelity Blue Chip Growth (FBGRX). Since Sonu Kalra took over management duties at Fidelity Blue Chip Growth in mid 2009, he has steered the fund to an 18.8% annualized gain, handily beating the S&P 500 index and peer large-company growth funds. His fund’s 10-year annualized return, a whopping 17.5%, topped all the other portfolios highlighted in this story, too. By comparison, the S&P 500 gained 12.7% annualized. The fund charges a low, 0.48% annual expense ratio.

Kalra aims to invest in companies that can sustain healthy growth rates for long periods of time. He likes to get in early and hold. Most of the fund’s 260-stock portfolio is made up of companies that he says are beneficiaries of long-term growth themes, such as e-commerce, cloud computing, generative artificial intelligence, and health and wellness. Most of the fund’s top holdings fall in this secular-growth category, including Amazon.com (AMZN), Alphabet (GOOG) and Apple (AAPL), and they have been in the portfolio for well over a decade. “That’s a sign we’re doing our job well,” Kalra says. 

Much of rest of the portfolio is devoted to companies with shares that might be flagging but are poised to benefit from a cyclically driven growth phase (energy stocks during COVID, say, or housing stocks when that industry is in a slump). A smaller group, which Kalra calls “self-help stories,” are businesses with a new manager or product (think of a retailer, for instance, with a growth driver that’s underappreciated). 

But the fund’s stake in private companies sets Blue Chip Growth apart. They make up just 3% of the fund’s assets, but, Kalra says, “the private placements allow me to build a relationship with a company years before it goes public. So by the time it does, I have conviction on whether to buy it or not.” He owned a small stake in Facebook, now Meta Platforms (META), before it went public in 2012. After its IPO, the stock lost half its value, but Kalra bought more shares because he had confidence the company would do well, especially after it enhanced its smartphone app to boost advertising revenues. Meta stock, now a top-10 holding, has increased an average of 23% per year since its IPO (a 12-fold climb from its opening price).

Natixis U.S. Equity Opportunities (NEFSX). Two subadvisers divide the assets in this large-company stock fund. Roughly half of the fund is run by the folks who manage the vaunted Oakmark value fund, namely Bill Nygren, Michael Nicolas, Robert Bierig and Michael Mangan at Harris Associates. A growth-tilting stock-picking team from Loomis Sayles, led by Aziz Hamzaogullari, manages the other half of the assets. The end result is a large-blend fund. 

Over the past 10 years, the fund’s 13.1% annualized return outpaced the S&P 500. But in truth, the fund’s performance has been spotty. U.S. Opportunities has lagged the benchmark in six of the past 10 calendar years (2022, 2021, slightly in 2019, 2018, 2016 and 2014). Average returns with high risk are characteristic of the past three years, according to Morningstar. It’s reason to be a bit wary of this fund. Its annual expense ratio, 1.09%, ranks above average for its category. 

Value guru Nygren and his team aim to purchase shares in large-capitalization companies that trade at least 30% below the team’s estimate of the companies’ intrinsic value, or true business value. But growth can be a value in their book. Meta Platforms (META) and Alphabet (GOOG), for instance, were among Nygren’s holdings at certain points over the past decade. “The opposite of cheap isn’t growth,” Nygren is famous for saying; rather, “it’s expensive.” The track record of Nygren’s Oakmark fund, which is run in a manner similar to the way he runs his portion of this Natixis fund, ranks among the top 3% or better of its peer group (large-company value funds) over the past five, 10 and 15 years.

Meanwhile, Loomis Sayles’s Hamzaogullari and his team run their portion of U.S. Equity Opportunities using a seven-step process that targets companies that have high barriers to entry or a competitive edge in their industry, throw off plenty of cash, and have good executives at the helm who have the long term in mind (not a quarter-to-quarter mind-set). Also, price matters: Hamzaogullari is only interested in purchasing shares if the company’s stock trades below his estimate of the company’s intrinsic value. Hamzaogullari is also behind Loomis Sayles Growth fund, which ranks in the top quartile of large-company growth funds over the past three and 10 years. Nvidia has been a top-performing pick for the Loomis half of U.S. Equity Opportunities over the past year. 

Smead Value (SVFAX). Value stocks have been out of fashion for most of the decade, which makes Smead Value’s 12.0% annualized 10-year return notable. That doesn’t outpace the S&P 500, but the large-company value fund ranks among the top 1% of its peers, despite a high annual expense ratio of 1.24% (above average for its category). 

Its secret? “We’re probably dead wrong 30% of the time, so we spend a lot more time trying to figure out where we were wrong than where we were right,” says longtime manager Bill Smead, who has an impressive memory for historical market data. He runs the fund with his son, Cole.

Over the years, they’ve learned from their mistakes. One thing they’ve found is that it pays to hold on to winners. Besides the low cost of an index fund, “the S&P 500 has an advantage over active stock pickers: low turnover,” says Smead. S&P 500-trackers “hold their winners to a fault.” So he does, too. Smead first bought stock in biotech firm Amgen (AMGN) in 2011, for instance, when it traded at $52 a share and a price-earnings ratio of 11. “Today, it’s a $300 stock and has paid out massive dividends,” he says. The fund’s typical holding period is about seven years. 

Companies in the portfolio must fulfill an economic need, have a strong competitive advantage in their industry and a long history of profitability, generate high levels of free cash flow (money left over after expenses to operate and invest in the business), and trade at a low price relative to their intrinsic value. Top holdings include American Express (AXP) (which Smead describes as “the Mother Teresa of financial firms”), Occidental Petroleum (OXY) and Merck (MRK).

The portfolio’s 28 stocks trade at an average P/E of 14 and boast average cash-flow growth of nearly 12%. Compare that with the S&P 500’s average P/E of 21 and cash-flow growth of 9%. “Our companies are superior to the S&P 500, and you’re getting them at a bargain to the S&P 500,” he says. With his portfolio holding none of the enormous companies that currently dominate the market, Smead calls his fund the “antidote” to the problem of mega-cap concentration in the S&P 500. 

Mid-size company stock funds

Baron Focused Growth (BFGFX). “Our favorite holding period is forever,” says David Baron, who runs the Focused Growth mid-cap growth fund with his father, Ron Baron. They like to invest in growing businesses that they believe can double in market value within five to seven years. The Barons typically keep the portfolio to a trim 20 to 30 stocks, getting in early when companies are small to midsize—the younger Baron says this is “a SMID fund”—and holding on as long as their investment thesis still stands. Stocks in small and midsize firms make up three-fourths of the fund; large stocks account for 11%.

Focused Growth currently holds 34 stocks. That’s higher than usual, says David, because the fund had 10% of assets in cash about 18 months ago that the Barons have since put to work in a stack of new opportunities, including sneaker company On Holding (ONON) and Spotify Technologies (SPOT). 

The fund’s 10-year annualized return of 15.3% ranks among the top 2% of mid-cap growth funds—beating its benchmark, the Russell 2500 Growth index, which gained 9.4% annualized, as well as the S&P 500. But from the start of 2014 through 2016, Focused Growth lagged its peers in a big way, thanks in part to Tesla (TSLA), which was teetering toward bankruptcy then. “That was a tough time in the market,” says David. “We’re okay not making money in stocks for two to three years. As long as we can get the double in four to five years, we’ll continue to invest in the stocks if they’re trading at attractive prices.” Tesla is the top holding in the fund today. “Musk’s balance sheet has no debt, and he’s sitting on $28 billion in cash—and that’s after spending $10 billion this year on capital expenditures,” David says.  

In other words, the Barons are willing to be patient with Tesla. Other times, however, they’re inclined to sell. The pair owned Penn National Gaming (now Penn Entertainment (PENN)) in the early 2020s, but a couple of acquisitions left the balance sheet with too much debt, David says, and the firm was “spending in the wrong places.” They unloaded their stake in 2023. 

Baron Focused Growth has outpaced its peers and its benchmark in six of the past 10 years. Volatility is high, though aggressive investors may find the rewards worth the risk. The fund’s expense ratio is 1.32%, above average for its peer group.

Diamond Hill Select (DHTAX). Small- and midsize-company stocks dominate the portfolio of Diamond Hill Select, but the fund can invest in companies of any size. Its benchmark is the Russell 3000, which tracks about 96% of the investable U.S. stock market (the S&P 500 covers 80%). 

Austin Hawley and Rick Snowdon have run the fund since 2013. They call themselves “intrinsic value investors,” which means they like a good bargain, but they also consider a firm’s growth prospects, too. (Morningstar currently classifies the fund as mid-cap value.) When big tech names sold off in early 2022, Hawley and Snowdon picked up stakes in Microsoft (MSFT), Alphabet (GOOG) and Amazon.com (AMZN). Those moves helped the fund deliver a 30.2% gain in 2023, beating the Russell 3000 and the S&P 500. The managers sold their stakes in Alphabet and Microsoft at different points in 2023 as those share prices moved up significantly, but they still own Amazon. 

The fund is trim (hence the “Select” part of its name), holding just 28 stocks at last report. That may explain why it has been more volatile than other midsize-company funds over the past 10 years, though its returns have made up for the added risk. Over the past decade, its annualized return of 10.8% didn’t beat the broad market, but it outpaced 97% of its peer group. For context, the Russell 3000 gained 12.1% annualized over the same period. And the fund’s five-year annualized return even surpassed the S&P 500. Its greatest hits over the past decade include mortgage-servicing company Mr. Cooper (COOP) (formerly Nationstar Mortgage Holdings) and Wesco International (WCC), a leader in electrical, communications and utility distribution. 

Investors should note, however, that the fund’s Morningstar style classification tends to shift. Select has been in Morningstar’s mid-cap value category since the start of 2021, but between 2015 and 2020 it was considered a large-cap blend fund, and in 2014 it was called a large-cap value fund. “I don’t think there’s a good peer group for the fund, and that’s a challenge for a strategy like ours,” says Hawley, who adds: “We believe it’s a benefit to have an all-cap universe. It allows us to capitalize where we see the best opportunities.” The fund charges an above-average fee of 1.16%.

FAM Dividend Focus Fund (FAMEX). Paul Hogan, the founder of FAM Dividend Focus, likes to take the long view: “We really think in terms of decades when we pick businesses for the fund.” One of the mid-cap blend fund’s original holdings from its launch in 1996 is still in the portfolio, and a number of holdings go back to the early 2000s. 

As the fund’s name implies, dividends are key. Every company in the fund pays one. But a high yield isn’t the focus. “That dividend has to be growing,” says Hogan, who took on a comanager, Will Preston, in 2020. “We want to see a history of dividend growth and that it will continue to grow at a good clip.” 

If a company cuts or stops paying its dividend, that’s an “automatic disqualifier,” says Preston. “We’re not going to own that stock anymore.” But if the payout remains steady for a year or so, that’s okay. For the 12-month period ending April 25, 23 of the fund’s 26 stocks increased their dividend, by an average of 9%. 

Of course, other measures matter, too, when Hogan and Preston pick stocks. They’re looking for company access (they visit every company they own at least once a year), ethical managers, and a high and increasing rate of return on the capital invested in the business (a profitability measure known as return on invested capital). Among the many other factors the managers consider when they assess a company’s quality are whether the chief executive knows most of the employees by name and whether the executive team is willing to take a pay cut to keep the factory going during a global pandemic.

Companies have to be midsize at the time of purchase, as defined by the Russell Midcap index (its current average market value is more than $26 billion), but Hogan and Preston let their winners run. “The fund’s best performers grow to be the largest holdings in the fund, and that’s the largest source of our outperformance versus peers and the index,” says Hogan. The average market value of the fund’s top holdings, for example, is $48 billion. Trane Technologies (TT), the HVAC system company, has a $74 billion market value and has been in the fund since 2015; medical-equipment maker Stryker (SYK), with a $126 billion market value, dates back to 2009. 

Resisting the urge to trim winning stocks “leads to low fund turnover and low taxes,” says Hogan. It helps keep a lid on risk, too. Over the past three, five and 10 years, FAM Dividend Focus has delivered well above-average returns with below-average volatility. “You’re taught in business school that if you want high returns you have to take on high risk, but that’s not the case with this fund at all,” says Hogan. 

The fund’s 11.6% annualized return over the past decade ranks among the top 5% of all midsize-company blend funds. That’s net of expenses, which are 1.22% per year—above average for its peers. And its 10-year record beats the 9.5% return in the Russell Midcap index, too. Even more impressive, the fund has outpaced its peer group in nine of the past 10 years. “These results are repeatable for us because we’re not chasing an economy reopening story, or interest-rate cuts or interest rates going up,” says Hogan. “We don’t have to do that. We simply own quality companies where customers have to or want to do business with.”

Small-company stock funds

Hennessy Cornerstone Mid Cap 30 (HFMDX). This fund has the term “Mid Cap” in its name, but it skews small, with an average market value for stocks in the fund of $5.4 billion. The managers of this small-cap value fund use four simple steps to choose 30 stocks. 

The aim is to buy undervalued companies with proven sales and earnings growth. The process starts with company size—only companies between $1 billion to $10 billion in market value are considered—and a price-to-sales ratio of less than 1.5. Next, annual earnings must be higher than the previous year (the companies don’t have to be profitable, but earnings must be trending in a positive way), and shares must have posted a positive gain in price over the past three and six months. And that’s basically it. 

The four-step process whittles a list of about 5,000 down to roughly 100, which are then ranked by 12-month returns. The top 30 become the portfolio. The fund’s assets are equally divided into the 30 names, and then the managers leave the portfolio alone for a year, rebalancing typically in the fall. “We try to only have long-term gains whenever possible,” says Ryan Kelley, who manages the fund with Neil Hennessy and Joshua Wein.

It’s a simple process that has not changed over the fund’s 21-year history. The results? A 12.2% annualized gain since inception in 2003, which beats the small-cap benchmark, the Russell 2000, as well as the S&P 500. Over the past decade, the fund boasts a 12.2% annualized return, shy of the S&P 500’s gain but ahead of the 7.7% average annual gain in the Russell 2000. “The reason we like this process is that it takes the emotion out of investing,” says Kelley. The fund’s expense ratio, 1.34%, is above average for its peer group.

Needham Aggressive Growth (NEAGX). Small-company stocks are the focus at Needham Funds. “It’s all we do. We live and breathe these companies,” says John Barr, longtime manager of small-company growth fund Needham Aggressive Growth. 

Barr focuses on under-the-radar companies that are investing in a new product or service that’s poised to boost the firm’s results. To provide stability, he says, the company’s new endeavor must be funded by a legacy or established business that’s profitable or generating cash—not by debt. 

Over the past decade, that process has delivered chart-topping returns to shareholders. The fund’s 10-year annualized return, 15.3%, walloped the Russell 2000 small-company index, as well as the S&P 500. 

The ride has been bumpy, but that’s a given—small-cap stocks tend to be more volatile than their larger brethren. It’s worth noting, however, that Needham Aggressive Growth has been a tad less volatile than the typical small growth fund, as well as far more rewarding. 

Taking the long view and holding on to winners past the small-cap stage is part of Barr’s game. “The challenge is just to hold on and not sell,” he says. He’s drawn to firms run by founders, families or long-tenured executives “because they think long term,” he says. The fund owns shares in nearly 80 companies and typically holds for eight to 10 years. Its top holding, Super Micro Computer (SMCI), has been in the fund since 2009 and is a “100-bagger for us,” Barr says. 

He likes to get in early, buying stakes in promising, mostly micro-cap-size companies he calls “hidden compounders.” If successful, they shift into what Barr calls the “transition compounder” stage, when the company’s new venture starts to impact results. Eventually, good companies grow into “quality compounders,” or leaders in established—but growing—markets. Half of the hidden compounders make it to the transition stage, and then only about 20% become quality compounders. 

Among many memorable winners over the past decade are two semiconductor industry players, Nova (NVMI) and Entegris (ENTG), both longtime holdings that are still in the portfolio. Each has climbed more than 11-fold in price over the past decade. Barr remembers some losers, too, such as Dirtt Environmental Solutions (DRT), a Canadian maker of premanufactured walls and systems for the construction market. He bought shares in 2017 then watched the stock tank, selling in 2020 at roughly a 60% loss.  

Small-cap stocks have lagged the broad market over the past decade, but “there are small caps out there that have done well and continue to do well,” says Barr, adding that he’s found success in part by focusing on firms with good balance sheets that throw off cash, operating in steady businesses that are less vulnerable to the whims of the consumer. The fund’s annual expense ratio, 1.82%, is well above average for its peer group. 

Thrivent Small Cap Stock (TSCSX). To avoid value traps, or stocks that are cheap because they deserve to be, the managers at Thrivent Small Cap Stock give prospective companies what fund comanager Jim Tinucci calls the “APGAR test,” the name for the health screen that newborn babies receive just after birth. But instead of gauging skin color, muscle reflexes and heart rate, Thrivent’s small-company test focuses on industry and company growth, competitive advantage, size of the total market that the company attempts to address, and whether key profitability yardsticks measure up. 

Firms that fail the test don’t get a closer look. “Value traps are companies in industries that don’t grow and are already fully penetrated,” says Tinucci, who manages the fund with Matthew Finn and Katelyn Young. “So, in our first look, we’ll know if this is a business we want to do further work on or not.” When they invest in a stock, its market value must fall at or below that of the largest firm in either the Russell 2000 ($49 billion in late April) or the S&P SmallCap 600 index ($8 billion).

Something about the manager’s APGAR test for small companies is working, because this small-cap blend fund has outgunned the Russell 2000 over the past decade. Its 10-year annualized gain of 11.4% ranks among the top 2% of its peer group. By contrast, the Russell 2000 has a 7.7% annualized return. Thrivent Small Cap Stock charges a below-average 0.81% expense ratio, according to Morningstar. The fund typically holds between 80 and 120 stocks. Its longest-held stock, Curtiss-Wright (CW), makes equipment for the aircraft and naval defense industries. Since early 2014, when the fund first purchased it, the stock has more than quadrupled in price

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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But uncertainty about the path of interest rates can destabilize bonds, too, so price swings have continued into 2024. "It's been a challenging time," says Elizah McLaughlin, who manages the Fidelity Intermediate Municipal Income Fund (FLTMX) with Cormac Cullen and Michael Maka. 

Even so, over the past 12 months, Intermediate Municipal Income – a member of the Kiplinger 25, our favorite no-load mutual funds – turned in a 2.7% return, which outpaced the 2.1% gain in the Bloomberg Municipal 1-15 Year index. 

"Our goal is to deliver a consistent risk-adjusted return," says McLaughlin. "We're not trying to shoot out the lights every year."

She and her cohorts focus on municipal bonds, which pay income that is exempt from federal taxes. Their process is very "collaborative," which McLaughlin says differentiates their fund from others. 

The managers work with 13 fundamental analysts, three dedicated traders and a quantitative analyst. They sit together in a custom-designed space in Merrimack, New Hampshire, where most of Fidelity's bond pickers are based. "It's just a constant flow of information," she says, adding that the depth of research the team puts into securities is another differentiator. "That's where our expertise comes into play," says McLaughlin. 

That know-how helped this past year. The Fidelity mutual fund is heavily tilted toward revenue bonds, which are IOUs for projects such as toll roads that generate income to pay off bondholders. Some of these bonds tend to be less volatile when interest rates are rising, which helped the fund's performance in the early part of the past 12 months. 

In more recent months, the fund's heftier stake in revenue bonds with single-A, triple-B and lower credit ratings, relative to the benchmark, boosted the fund's return. Intermediate Muni Income yields 3.4%, a tax-equivalent 4.5% for investors in the 24% federal income tax bracket. 

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The funds offer a simple way to diversify. For example, if your stock portfolio is heavy on shares of individual technology and energy companies, balancing those holdings with ETFs in sectors such as real estate and healthcare can provide a smoother ride. And a sector fund could make sense if you have a strong conviction that a particular area of the economy, such as finance, is underappreciated and will accelerate as investors recognize its true value.

I have been analyzing long-term data on Select Sector SPDR ETFs, which are managed by State Street and based on indexes that are subsets of the S&P 500 index, the large-company benchmark. Some of the results are striking. 

As you can probably guess, one sector has been a standout performer: technology. For the past 10 years, the average annual returns of seven out of the nine sector funds I studied fell into a narrow range, from 8.2% to 12.3%, but the Technology Select Sector SPDR Fund (XLK) averaged 20.7%. The tech fund was dominant throughout the decade: It was the top-performing sector fund in four of the past 10 calendar years and ranked in the bottom half only twice. 

But you might be surprised at how some companies that most of us consider technology holdings are classified by S&P (and, therefore, State Street). For example, Amazon.com (AMZN, $180), which returned an average of 26.8% over the past 10 years, is in the consumer discretionary sector ETF, and Alphabet, Netflix (NFLX, $607) and Meta Platforms (META), the former Facebook, are all in the communications services sector fund. (Prices and other data are as of March 31 unless otherwise noted.) 

Not including such stocks is a real drawback. That’s why I prefer Invesco QQQ Trust (QQQ, $444), which owns the largest Nasdaq companies, including all of the SPDR omissions. The ETF carries an expense ratio of 0.2%, compared with 0.09% for the State Street funds, an insignificant difference. 

The other outlier over the past 10 years has been energy. The SPDR fund returned an average of just 4.6%. The sector was highly volatile, ranking first in three of the past 10 calendar years and last in six. 

Sector fund returns converge... eventually

Although the returns of sector funds are scattered over 10 years, they converge over very long periods. State Street introduced the original nine sector ETFs in December 1998. (Real estate was added in 2015; communications services in 2018.) On average, during the 25 years ending in December 2023, the sector funds in existence — with one exception — returned between 6.8% and 9.5%. 

The laggard was the financial ETF, at just 5.1%. Banking suffered badly in the 2008–09 recession, and low interest rates during the entire period hurt profitability. Tops over 25 years was the consumer discretionary category, which edged out tech, health care and industrials (all within nine-tenths of a percentage point of the leader). 

The Consumer Discretionary Select Sector SPDR (XLY, $184), which ranked second over the past 10 years, includes automobiles, hotels, restaurants, entertainment and many retailers. There’s much to like in this sector, which performs well when the economy is strong, but the fund itself has become top-heavy, adding to risk by subtracting the benefits of diversification.

The two leading holdings — Amazon and Tesla (TSLA) — account for 36% of the fund’s assets. Tesla’s miserable performance at the start of 2024 was a major reason the fund trailed the S&P 500 by seven percentage points for the year to date. Still, I am recommending the ETF for its powerful portfolio, including McDonald’s (MCD, $282), Starbucks (SBUX, $91), Home Depot (HD, $384) and several homebuilders. 

One revelation from an examination of sector performance is that every ETF has rotten years. In 2022, tech finished eighth out of the nine original categories. Health care was second among the sector ETFs in 2014 and 2015 but last in 2016. You simply cannot predict how a sector will perform from year to year. 

Can you balance sector holdings?

For that reason, I believe a popular investment strategy called sector rotation is foolish. The idea is that you create a portfolio with disproportionate weight in certain sectors during particular phases of the business cycle and then move out of them as economic and market conditions change. For example, sector rotation favors utilities during the early stages of a recession and consumer staples during a late recovery. The strategy generates fees and time-wasting activity as you switch holdings, and there’s no evidence that it works. 

“At best,” an academic paper titled “The Myth of Business Cycle Sector Rotation” found, “conventional sector rotation generates modest outperformance, which quickly diminishes after allowing for transaction costs and incorrectly timing the business cycle.” Timing the business cycle is a futile endeavor. In 2022, most economists predicted a recession was coming the next year. But gross domestic product rose 2.5% in 2023, a rate that beat the average for the decade before COVID-19 hit. 

There are, however, good reasons for investors to put more emphasis on particular sectors. Technology has become the main engine of the U.S. economy. But I also like ETFs based on sectors that are out of favor, especially the Financial Select Sector SPDR Fund (XLF, $42), which returned an annual average of 10.9% over 10 years — compared with 12.9% for the SPDR S&P 500 Trust (SPY, $523), nicknamed “Spiders,” which reflects the entire large-cap benchmark. 

The financial SPDR fund has its own odd characteristics. Its top holding, at 13.1%, is Berkshire Hathaway (BRK.B, $421), even though Warren Buffett’s company invests half its assets in tech (mainly Apple) and about one-fifth in finance (nearly all in insurance). Owning a bit of Berkshire, however, is never a bad idea. The rest of the fund is conventional: JPMorgan Chase (JPM), Visa (V) and the like. Another good choice is the Vanguard Financials Index Fund (VFH, $102), which is more broadly diversified and has a similar 10-year record. 

My other preference for the next 10 years or so is the Health Care Select Sector SPDR Fund (XLV, $148). The population is getting older, therapies are getting better, and artificial intelligence will make care cheaper. BlackRock has ETFs that drill even deeper, such as the iShares U.S. Medical Devices ETF (IHI, $59), whose top holdings include Intuitive Surgical (ISRG, $399), which manufactures minimally invasive surgical systems such as da Vinci. 

Many investors, especially those with time horizons of 20 years or more, don’t need sector funds at all. Unless you need to balance a port-folio or have a strong belief in a certain part of the economy, you can get diversification the old-fashioned way simply by owning an S&P 500 fund such as Spiders or the Fidelity 500 Index Fund (FXAIX), a mutual fund that returned an average of 13% annually for the past 10 years, beating every sector fund except technology.  

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. Of the stocks and ETFs mentioned, he owns Amazon.com, Berkshire Hathaway, Starbucks, Invesco QQQ Trust and SPDR S&P 500. Reach him at JKGlassman@gmail.com.

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I often find that beginning investors want all the upside of the stock market and get upset when they see the market fall. Many times, they will pull the trigger too early and sell. They don't realize that markets will have dry spells and that some volatility is inherent in the investing process.

But how can folks avoid some of these investing mistakes? Here are some simple rules to follow when first starting your investing journey. The goal, we hope, is to help you avoid typical beginner investing mistakes.

Prepare for volatility. Unless you put all of your money into certificates of deposit (CDs) or money market funds, you can expect to see some variability in your returns. One tool to gauge how volatile a specific stock is in relation to the broader equities market is its beta. 

The S&P 500 has a beta of 1.0. So, a stock with a beta above 1 typically means it is more volatile than the broad market, while a beta below 1 signifies that the equity is less volatile.

Don't invest money that you've set aside for emergencies. Emergency funds are important and we have them for a reason. Leave enough cash to have in case of emergencies or being let go from work. Put this money in a high-yield savings account or even your checking account that you can easily access. 

Ideally, you have enough saved to cover at least three to six months of living expenses. By not putting this money in the stock market, it will not be subject to any kind of volatility or sudden price drops. Additionally, emergency funds should not be put in a CD or similar account where there are withdrawal penalties.

Don't borrow money to invest. Investment returns are not guaranteed, especially in the short term. You could end up paying more in interest and being stuck in more debt if you borrow money to buy stocks. 

Along similar lines, don't use money that should be spent on paying down current debt. Debt reduction comes ahead of investing. Once this is under control, especially with your credit cards, you can put the after-debt excess in various investment vehicles.

Build a pyramid of liquidity. For example, keep some of your excess cash in easy-to-reach vehicles such as savings, checking or money market mutual funds at a brokerage firm. This will allow you to leave your best long-term investment stocks in your portfolio and grow their returns over time.

Diversify slowly. After that, some portion, not the bulk of your excess investment assets, can be put in CDs. Don't put all this excess money into stock market funds. This will allow for a no- to low-risk way to grow your money. And rates are attractive right now, with several 1-year CD rates above 5%.

Money market accounts also give folks a safe place to store their money and get a decent rate of return. Some of the best money market accounts right now are offering yields over 5%.

Study your investing options. Still, arguably the best way to grow your money over time is in the stock market. For beginners, investing your hard-earnings cash in the stock market is best handled by first buying mutual funds, especially no-load mutual funds that don't have a commission or sales charge, and/or low-cost ETFs (exchange-traded funds). These are baskets of equities that spread the risk around, and investing in these first will allow you to develop a feel for the intricacies of the equities market.

Only after doing that for some period should you venture out and invest in individual stocks.

Stick with dividend-paying stocks. The best outcome over time for both beginning investors and long-time market participants is to buy stocks with larger market capitalizations (i.e., over $100 billion in market value) that pay regular dividends. 

An example of one of the best dividend stocks around is Coca-Cola (KO), which has a roughly $260 billion market cap and has paid out and raised its dividends annually for the past 62 years. If you don't believe us, just ask Warren Buffett, who first added KO to the Berkshire Hathaway equity portfolio back in the 80s. In his 1988 letter to Berkshire shareholders, Buffett said he expected to hold on to the stock "for a long time" and indeed he has.

Don't invest in speculative stocks. Avoid tip stocks (someone gave you a tip about a potential high-flyer) with no earnings, no dividends and a small market cap.

The best stocks to buy are those that you can live with over a long period. Don't try and make a killing with your first investing forays. The odds are arguably not going to be in your favor. This is especially true with penny stocks and/or cheap stocks trading below $5 to $10 per share with no dividends. 

Among the many reasons to avoid these low-priced stocks is the lack of liquidity, or the number of shares being bought and sold. This makes the stocks "the perfect vehicles for "pump-and-dump" schemes where stock promoters lure investors to buy shares, increasing the stock price," writes Dan Burrows, senior investing writer at Kiplinger, in his feature on why you should stay away from penny stocks. "Once the price gets high enough, the pumper sells his shares, causing the stock to fall and leaving investors with poor returns, or even losses. Anyone here see The Wolf of Wall Street?"

Also avoid stocks with earnings so low that their price-to-earnings (P/E) ratio is very high (i.e., over 30x for the coming year).

Find good investing research. There are plenty of free websites such as Kiplinger that offer sound information to help guide your investment journey. Many sites such as Yahoo Finance, Morningstar and StockCharts allow folks to research potential investing opportunities.

Doing your proper research and coming up with a plan will allow you to improve your long-term investment returns with decent results. It will also allow you to weather difficult investing periods when the market takes a downturn.

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This means you should keep good records of each of your investments. Your custodian or brokerage firm can typically track the initial cost basis and its changes over time, but you may have to make adjustments.

For example, some folks may not know that commissions or fees you pay your broker can affect the cost basis. The dollar value of these additional costs can be included in the purchase price of the investment.

It's important to check whether your brokerage firm or custodial firm adds these fees to the initial cost basis of any investments, including stocks, bonds and exchange-traded funds (ETFs).

Dividends or interest collected from your investment, while counted as income for tax purposes, can also potentially be added to your cost basis. If you reinvest that income to purchase more of the underlying investment, the initial cost basis can be adjusted. This could impact your capital gains taxes once the asset is sold because the cost basis will be adjusted to account for the new shares.

Here is where keeping good records comes into play. Often brokerage firms don't account for these reinvested income trades to adjust the tax cost basis in that investment. This means you should track your records, too, and make sure all the figures align.

How is cost basis calculated?

If you buy and sell the same stock, mutual fund, etc., over time, what is the best way to account for the cost basis of these trades? It turns out there are several methods.

Most brokerage firms and other custodial firms use the average cost method. This means that every time you buy or sell a stock, bond, ETF, etc., they calculate the average price from each transaction.

For example, let's say you initially bought 1,000 shares of a stock and paid $10 per share. Your cost basis is $10,000 (1,000 shares x $10 price paid per share).

The stock also pays a 3.3% dividend, meaning you received $330 in dividends for the year. You decide to reinvest those dividends and buy 30 more shares of the stock, which is now trading at $11 per share.

You now have 1,030 shares. But while the initial cost basis was $10.00 per share for 1,000 shares, the new adjusted cost basis that includes the second tranche is $10.03 ($10,000 + $330/1,030). This is slightly higher than the original $10.00 cost basis.

Now if you later sold 100 shares for $11.10, the proceeds from the sale would be $1,110, but what is your profit?

Simple. You use the adjusted cost basis of $10.03 per share to determine your profit. In other words, you would subtract your adjusted cost basis ($10.03) from the $11.10 per share and multiply that by 100 shares. That works out to be a capital gain of $107. 

While averaging is one of the easiest ways to calculate your cost basis, there are several other methods, though they tend to be a bit more complicated. These include First In, First Out (FIFO),  as well as Last In, First Out (LIFO), which calculate your cost basis based on when you bought the asset. Accountants will recognize that this is similar to keeping track of inventory in a company. 

There are good off-the-shelf software application packages to help you keep track of your investment costs. This is what money management firms do to aid in their record-keeping.

Why should I keep track of my cost basis?

The most important reason to track cost basis is to minimize your capital gains taxes and maximize your capital losses. This will help you pay the least amount of taxes.

But there are other reasons too. For one, it helps monitor your investment performance. This is especially true for day traders and high-net-worth or billionaire investors. 

Here is a good example. Options traders who sell short out-of-the-money puts and calls often allow the contracts to expire worthless. That is part of the strategy. Some brokerage firms may not track these kinds of trades accurately, so it's imperative to keep careful records of your own.

The bottom line is that tracking your cost basis allows you to accurately track the returns on your investments and the tax implications those returns may have.

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That idea isn’t wrong, but it’s also not entirely right. As with many things in the world of personal finance, it takes some digging under the surface to see why.

Monolithic diversification?

Over-reliance on mutual funds can lead to something I call the duplication trap. To understand what that means, consider the common scenario of a portfolio invested in more than one mutual fund.

Generally, when choosing a mutual fund, you look for the ones that perform the best. If you invest in 15 of the top-performing mutual funds, the logical assumption is that you’re well-diversified: Each mutual fund is itself diversified because it owns multiple assets. If one of the mutual funds makes unfortunate investment decisions and performs poorly, because you’re diversified in mutual funds themselves, the other 14 can help buffer the losses.

Making that assumption, however, risks a fall into a duplication trap. Consider why those 15 funds are the top-performing funds. Odds are, it’s because they’re all investing in largely the same assets! For example, if Mutual Fund 1 invests in Microsoft, Apple, Google and Nvidia, and so do Mutual Funds 2 through 15, then what you’ve done is invest in the same four tech companies 15 times. Suddenly, all that diversification doesn’t seem so diverse.

This is why it’s important to investigate what exactly the mutual fund you’re considering is invested in, especially if you already have other mutual funds in your portfolio. There’s no point in getting a second mutual fund that virtually mirrors the first — you might as well just increase your position in the first fund.

Unanticipated fees

I recently worked with a client who had about $1.3 million invested in mutual funds. She’d been working with a large financial services firm that charged fees for their services. What she failed to understand is her fees didn’t stop there. Each mutual fund has an expense ratio — a fee you pay for the management of the fund, separate from your adviser. She was paying considerably more than she realized in fees to hold multiple mutual funds that were all largely duplicates of one another.

This is a common hazard when working with very large financial services firms. When a firm scales up its operations to accommodate millions of clients, it must streamline. It’s impossible to individualize advice for every client, so the firm usually puts each client into a risk-tolerance category and then chooses funds for that category rather than the individuals in it.

This generally leads to a lack of diversity in your investment options, which can lead to paying excessive fees while tumbling headlong into the duplication trap.

Uncontrollable income

Another weakness of a mutual fund-heavy portfolio is most funds pass on the earnings (capital gains) to the fund holder, you. Each year, the investor must pay capital gains taxes on the distribution, regardless of whether you wanted it or not. You might ask, who wouldn’t want someone handing them cash in exchange for having to pay taxes? However, taxes aren’t the only issues these distributions can cause.

The client I mentioned above retired early, well before she was eligible for Medicare. When you do that, you need to find a way to cover your health care until you become eligible. This can be very expensive unless you qualify for reduced-cost plans through the Affordable Care Act. To qualify, your income needs to remain under certain limits depending on your household size.

If you’re heavily invested in mutual funds, all of which are sending you money each year, you may not be able to keep your income under those limits. Dividends for people with sizable stakes can be in the tens of thousands of dollars, forcing you to pay very high insurance premiums until you become eligible for Medicare at age 65.

This is a good example of why it’s important, as you near retirement, to consider how your investments might impact your finances in unexpected ways. Will they force you to pay too much for health care? Will they move you into a higher tax bracket? You need to be in control of how your retirement money gets distributed to avoid unpleasant surprises in health care spending or tax season.

In general, mutual funds are a solid choice for younger-to-middle-age investors who don’t yet have a financial adviser, especially if they’re part of your employer-sponsored 401(k) where a company match is available. As you approach retirement and start shopping for a financial professional, it’s a good idea to consider whether you should continue that strategy. Work with your adviser to determine the best investment strategy for your unique situation as you approach and enter retirement.

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Indeed, it was a year of reversals. U.S. stocks, for instance, rebounded and entered bull-market territory. The S&P 500 Index hit record highs in late 2023 and finished the year up 26%. Of course, those gains were largely driven by a handful of U.S. mega-cap stocks. We're talking about the Magnificent 7 stocks – namely Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) – which logged an average gain of 112% in 2023. Nvidia more than tripled in value; Meta nearly tripled.

Clearly, funds that invested in those companies fared the best last year. But with the Magnificent 7 sporting an average market value of $1.7 trillion, that meant small- and midsize company stock funds were left behind – but not too far behind. In fact, small and mid-cap stocks finished 2023 strong. The Russell 2000, an index of small companies, returned 17%; the S&P MidCap 400 index gained 16%.  

The Mag 7 had a ripple effect in U.S. stock sectors, too. The sector losers of 2022 – communications services, information technology and consumer discretionary – became 2023's winners. And the winning sectors of 2022 – energy, consumer staples and healthcare – largely brought up the rear in 2023.

International stocks came back as well. Shares in developed countries, as measured by the MSCI EAFE Index, gained 18%, lifted in large part by big gains in Nordic countries – Denmark gained 31%; Sweden was up 24% – as well as in Italy, Spain and Ireland. 

Emerging market stocks also did well. China, which makes up 28% of the index, was a drag, as an anticipated economic recovery has been slow to arrive; stocks there fell 11%. But other big market components of the benchmark index, including Taiwan, India, South Korea and Brazil, were up sharply. The MSCI Emerging Markets Index posted a positive 10% return for the year.

How we compiled the Kiplinger mutual fund guide

Here, we show the top-performing stock mutual funds in 11 categories, using information from Morningstar, the financial data firm that determines the categories into which the funds are sorted. In some cases, the classifications of certain funds may strike you as odd, and we have tried to correct or explain those instances as best we can. 

The list only includes funds with a minimum investment requirement of $10,000 or less. We removed funds available only to institutional investors, as well as leveraged funds (which seek to boost returns with borrowed money) and inverse index funds (which promise to move in the opposite direction of a benchmark).

Most of the funds listed are widely available at brokerage firms. A few must be purchased directly from the fund company. And some funds are closed, either to new investors or all investors. Many funds in the tables charge a front-end sales fee, but in most cases, you can purchase shares with no load or transaction fee at several large brokerage firms. 

That said, these lists are not meant to represent recommendations. Instead, we suggest you use them as a starting point for your own research. (All data and returns are through December 31, unless otherwise noted.) 

Large-cap stock mutual funds

Growth was the magic key for mutual funds.

It's been a growth-oriented decade, mostly, for this category. The Fidelity Blue Chip Growth (FBGRX) – a member of the Kiplinger 25 pick, our favorite no-load mutual funds – favors firms with competitive advantages, pricing power and top-flight executives. Nasdaq-100 index funds have prospered along with the mega-cap tech firms that now dominate the market. 

Among actively managed funds, one-year standout Zevenbergen Genea (ZVGNX) bets big on ground-breaking companies. The 29-stock portfolio (top holdings: Tesla and Nvidia) is for risk-takers with a long-term mind-set. Virtus Zevenbergen Innovative Growth (SCATX) is sub-advised by the same managers. 

Value funds held sway during the three-year period that included the most recent bear market. Oakmark (OAKMX) and sister fund Natixis Oakmark (NEFOX), with Alphabet atop both portfolios, at times display an iconoclastic take on "value." Smead Value (SMVLX) counts a handful of housing stocks and a real estate investment trust (REIT) recently among its top 10 holdings; it ranks in the top 25% of value-oriented peers in seven of the past 10 years.

Mid-cap stock mutual funds

Tech is on top – for now.

Midsize funds that focused on the tech sector did best over the past year. But because the sector has been so volatile, some 2023 winners are still making up for previous years' losses, such as American Beacon ARK Transformational Innovation (ADNPX), managed by ARK Invest's Cathie Wood. 

The leaders over longer periods have more-diversified portfolios. Invesco Value Opportunities (VVOAX), for example, scored in the top five for three- and five-year returns thanks to a portfolio heavy on comparatively low-valuation stocks in the industrial, energy and materials sectors. 

Baron Focused Growth (BFGFX), number one for both five- and 10-year returns, puts less than 10% of its port­folio in tech stocks. (Its single largest holding, at 13% of assets, is Tesla, classified as a consumer stock.) The Baron port­folio is heavy on hotels, resorts and consumer stocks such as donut company Krispy Kreme (DNUT), which returned almost 50% in 2023. 

Small-cap mutual funds

These small-cap mutual funds were mighty.

The lines can blur when labeling small and midsize funds. With an average market value for portfolio holdings of $4.4 billion, Hennessy Cornerstone Mid Cap 30 (HFMDX), featured on three of the winners' lists here, fits well with the smalls. The fund ranks in the top 25% of small-cap funds with a value bent in seven of the past 10 calendar years and in the top 10% for five of them. The 30-stock portfolio recently had big bets, compared with peers, on energy and industrial companies. 

The Needham Aggressive Growth Fund (NEAGX) was all-in on tech, with 61% of assets in the sector. The fund, with a lofty 1.9% expense ratio, makes the one-, five- and 10-year winners' lists. Oberweis Micro-Cap (OBMCX) favors the smallest of the small fry; top holding Aehr Test Systems (AEHR) serves the semiconductor industry. The Fuller & Thaler Behavioral Small-Cap Growth Fund (FTXNX) swoops in when the market underreacts to positive news, such as large earnings surprises.

Hybrid mutual funds

Hybrid mutual funds allow for a pastiche of approaches.

These funds hold a mix of stocks, bonds and other assets. Target-date funds fall into this category, but they don't often show up in these tables, which makes the Putnam Retirement Advantage funds' (PCJZX, PAAVX) appearance in the one-year table a little conspicuous. 

The rest of the funds are a smorgasbord of strategies. Fidelity Balanced (FBALX) holds a steady mix of roughly 60% stocks and 40% bonds. Baron WealthBuilder (BWBFX) is a fund of funds. It holds 16 Baron funds and is designed to represent the ideal diversified portfolio across market caps, geographies and sectors. 

Other funds shift their asset allocation depending on the market. Fairholme Focused Income (FOCIX), for one, aims to generate income and has the leeway to invest in corporate bonds, bank loans, government and agency IOUs, convertible bonds, stocks, and real estate investment trusts, among other assets. At last report, it held roughly 70% of its assets in short-term government bonds and 30% in stocks.

Large-cap foreign stock mutual funds

 Large-company foreign stock funds are still lagging U.S. counterparts.

Most years, investors would be delighted with the 16% average return notched in 2023 by funds that specialize in large foreign companies. But that marked the eighth year out of the past 10 that the group underperformed funds of large U.S.-based firms. 

One fund that beat the U.S. bogey last year, Brandes International Equity (BIEAX), focuses on value stocks, especially in Europe and South America. Rolls-Royce Holdings (RYCEY), which tripled in 2023 due in part to booming sales of aircraft engines, is a top holding. (The luxury-car nameplate was purchased by BMW in 1998.) Another top holding, Brazilian energy company Petróleo Brasileiro S.A. – Petrobras (PBR), doubled in 2023. 

A tech-heavy growth strategy propelled the Fidelity International Capital Appreciation Fund (FIVFX) into the top-10 lists for one, five and 10 years. Its top holding, Taiwan Semiconductor Manufacturing (TSM), gained 30% in 2023 and has more than doubled since the fund's initial investment in October 2019.

Small- and mid-cap foreign stock mutual funds

Small foreign stock funds had a banner year – a turnaround from 2022, when the typical fund lost 23%. Brown Capital Management International Small Company (BCSVX), a Kiplinger 25 fund, gained 20% in 2023, clawing some of the way back from a 32% loss in 2022. The managers favor high-quality growth companies, such as U.K.-based maker of research tools Abcam and REA Group, a global online real estate advertising firm based in Australia. 

Value-oriented funds dominate the three-year table, including Oakmark International Small Cap (OAKEX), which is run by David Herro, Michael Manelli and Justin Hance. Last year, they found buys in Europe, where 57% of assets are invested. Shares in top holding Konecranes (KNCRY), a Finland-based firm that makes cranes and lifting equipment, climbed 46% in 2023. 

Managed by Jed Weiss, the Fidelity International Small Cap Opportunities Fund (FSCOX) has delivered above-average returns with below-average volatility.

Global stock mutual funds

Global stock mutual funds create a broad universe for investors.

Because these funds typically hold 60% of assets in U.S. shares and the rest in foreign stocks, they fared better over the past year than funds that focus only on foreign stocks. (In fact, U.S. stocks have outpaced foreign markets for much of the past decade.) 

T. Rowe Price Global Stock (PRGSX) has outperformed its peer funds, (global large-company growth) in eight of the past 10 calendar years. Top holdings include the usual suspects: Amazon.com, Microsoft, Apple and Nvidia. 

The Dodge & Cox Global Stock (DODWX), which follows a value strategy, shone over the past three years. Alphabet is a top holding, but the fund also has a load of healthcare stocks, including pharma giants Sanofi (SNY) in France and GSK (GSK) in the U.K. 

Why is the Guinness Atkinson Alternative Energy Fund (GAAEX) listed here and not with the sector funds, below? In part because the fund's holdings are a mix of tech, industrial, basic materials, utilities and economically sensitive consumer stocks.

Diversified emerging market stock mutual funds

These diversified EM stock funds look beyond China.

China stocks fell 11% in 2023, but the MSCI Emerging Markets Index climbed 10% anyway, fueled by double-digit gains in Taiwan, India, South Korea and Brazil. Eye-popping returns in smaller markets – Greece, Hungary, Poland, Mexico and Peru – helped, too. 

Funds that top the one-year winners table each held a hefty chunk of assets in India, Mexico and Brazil, but most had some exposure to the U.S., too. The Artisan Developing World Fund (ARTYX) is an outlier in this category; 40% of its assets sit in U.S. stocks. 

The Matthews Emerging Markets Small Companies Fund (MSMLX) wins a spot on the three-, five- and 10-year tables. Be aware, however, that new managers took over in 2020. Since then, the fund has been trouncing its competition, which has helped lift its long-term annualized returns. 

The Wasatch Emerging Markets Select Fund (WAESX) holds just 30 to 50 stocks, so it can be more volatile, but over the long haul, the results have been solid.

Regional and single-country mutual funds

There are bright spots for investors the world over.

Last year was a good one for multiple regional markets and countries – both developed and developing – including Latin America, Europe, India and Japan. 

Perennial winner Fidelity Nordic (FNORX) snagged spots in the one- , five- and 10-year tables, thanks to healthy gains over the past decade in Denmark, the Netherlands and Sweden. (Finland, the fund's only other market exposure, hasn't been as steady.) 

Those looking for an India fund might consider Matthews India (MINDX), which has delivered above-average returns with average volatility over the past decade. 

Japanese stocks gained 20% last year, thanks to corporate reforms that are, at long last, boosting earnings growth at some firms. But looking ahead, the end of a negative-interest-rate policy in Japan raises uncertainty for stocks in the market. Even so, the Hennessy Japan Fund (HJPNX) stands out over the long haul. The fund lagged peers in 2019, 2021 and 2022, but last year it topped all other Japan-focused funds.

Sector-specific mutual funds

Tech funds dominate the one-year winners, thanks to a small group of companies that led U.S. shares in 2023. One of those stocks, Nvidia, gained 239% over that period. Shares in the chip designer make up 26% of Fidelity Select Semiconductors (FSELX) and helped the fund win the top spot in three time periods. But the fund is more volatile than most tech funds because it confines its investments to semiconductor-related businesses. 

Other tech funds, including Fidelity Select Technology (FSPTX) and Columbia Seligman Technology and Information (SLMCX) – which trades load-free at Schwab and Fidelity – invest in multiple tech industries, including software, hardware and internet services. Both funds have been less volatile over the past five and 10 years than other tech funds. 

Over three years, energy funds stand tall – that's largely on the back of blockbuster returns in 2021 and 2022. In 2023, energy funds struggled to eke out an average 2% gain.

Alternative mutual funds

Alternative mutual funds offer a wealth of options.

Eclectic, nontraditional strategies that offer diversification from stocks and bonds fit here. Three bitcoin funds – all invest in bitcoin futures contracts – soared to the top of the one-year table after prices of the digital currency rebounded. 

But options-based strategies pack the tables. The JPMorgan Hedged Equity 3 Fund (JHTAX), in the one-year table, and its older sibling, the JPMorgan Hedged Equity Fund (JHQAX), a 10-year winner, have the same managers and employ a similar strategy. Part of each fund is invested in stocks to track the S&P 500; the rest is in options to protect against market sell-offs. Over the past decade, Hedged Equity beat the average balanced fund, which invests 60% in stocks and 40% in bonds, with less volatility. 

Commodities funds had a terrible 2023, posting an average loss of almost 6%, but they dominate the three-year tables because of hearty gains in 2021 and 2022. The Camelot Event Driven Fund (EVDAX) targets shares in firms involved in mergers, takeovers and other corporate moves. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here. 

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To establish a foundation, it’s essential to understand that a mutual fund, at its core, is a “wrapper,” or an investment structure that allows many individual investors to pool their money to invest in a basket of securities. Instead of buying many individual securities on their own, investors invest in shares of a mutual fund to gain exposure to these securities with one purchase. Buying shares of a mutual fund allows for easier diversification among many securities.

Now, let’s dig into the three most common misconceptions about mutual funds.

Misconception #1: Mutual funds give investors the opportunity to beat the market.

I can see where this misconception originated since active investment managers predominantly used mutual funds. The mutual fund structure dates back nearly 100 years in the U.S., gaining popularity in the 1970s and 1980s. Historically, mutual funds were investment vehicles accessing active investment strategies where professionals running the funds attempted to beat the market they were compared to.

In the 1970s, the first passive investment S&P 500 index fund was made available to retail investors. It was designed to track the market, not beat it. As the popularity of index investing grew, more passively managed mutual funds came to market.

If you participate in a 401(k) or 403(b) plan through your employer, odds are you are given a list of mutual funds to choose from, and there are likely passively managed/index options available to keep plan expenses low. A mutual fund is just a structure to pool investors, and it is critical to understand the stated investment strategy, the underlying investments and the cost of the funds you are considering, which vary per fund.

Misconception #2: Mutual funds have high expenses.

Many legacy funds have high expenses, including manager fees and commissions, which have dominated this investment vehicle for decades. However, many mutual funds today have low expenses. Over the mutual fund’s long history, commissions and fees were relatively high by today’s standards. Further, most actively managed funds failed to beat their benchmarks’ net of fees, leading to investors looking for other options. The mutual fund wrapper became confused with the cost of the active management of many funds.

A lot has evolved in this structure over the past few decades. Fees have been driven down, and a lot of low-cost passive index replication strategies have been offered in the market using this vehicle.

Mutual funds are available in all types of asset classes ranging from stocks, bonds, commodities, real estate and money market. There are mutual funds that blend stocks and bonds for certain levels of risk appetite and many that give investors access to liquid alternative investment strategies. The expense level will be driven by how the mutual fund is managed and what type of assets it invests in. For example, a U.S. stock mutual fund will likely have different costs than a mutual fund investing in commodities.

Investors should also pay attention to the share classes of a specific mutual fund. In many cases, a fund may have multiple share classes with different expense levels. Investment minimums may apply to getting access to the lowest-cost share classes. One of the largest passive index mutual funds operates with a 0.04% annualized fee, which is an example of not all mutual funds having high expenses.

Misconception #3: Buying mutual funds is an investment strategy.

In many cases, investors will use multiple mutual funds to design a well-diversified portfolio to meet their needs. They may also use mutual funds to access a specific asset class on part of their portfolio and different types of investment vehicles for other parts of the overall strategy. For example, a mutual fund that is managed to passively track the S&P 500 index will invest only in large U.S. publicly traded stocks. That might suit certain investors who are comfortable with their entire investment portfolio moving up and down with that particular index.

However, investors who may not need to or be able to tolerate that level of price volatility may end up adding other investment strategies to their portfolio to balance out their stock exposure. They may end up adding an investment allocation to mutual funds that invest in bonds or owning the bonds directly if that is better for the specific investor.

While we discussed three common misconceptions about mutual funds, some of this also applies to a more modern pooled structure called exchange-traded funds (ETFs). These, too, can come with different types of investment strategies and a range of costs. However, investors have different misconceptions about ETFs; many believe they are all low-cost and better than mutual funds.

In some respects, ETFs come with more advantages than mutual funds. For example, being able to trade them throughout the day, certain asset classes are more tax efficient in this wrapper than in a mutual fund, and it is possible to see all the underlying holdings daily. While this is not an exhaustive list, the main point is you must still research what each invests in and how it manages the strategy.

Not all mutual funds are expensive, and not all ETFs are cheap. Remember, these are just pooled vehicles that allow investors access to a basket of securities with one purchase vs buying all individual securities on their own. A financial adviser can help you navigate these types of investments and determine a strategy for your goals and risk tolerance.

Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.

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Keep in mind this article is not meant as personal financial advice. Retirees should work with financial professionals and do their own research to make suitable investment choices based on their own needs and goals. Kiplinger simply wants to provide an overview of what are generally considered the best conservative investments for retirees.

Moreover, as retirees get older, they should take stock of what is and what isn't working and potentially narrow their investment choices over time such that simplicity and liquidity become the highest priority.

Overall, some of the safest investments for retirees tend to be a mix of mutual funds, preferably index funds, that invest in the stock and bond markets, as well as liquid money market funds (i.e., those that pay interest).

How to choose the best conservative retirement investments

Warren Buffett is famously quoted as saying that retirees should invest the majority of their assets in low-cost ETFs (exchange-traded funds) that mimic the S&P 500. In other words, they use an indexing strategy that mirrors the performance of the 503 stocks that are included in the index.

Buffett is quoted as saying that up to 90% of investors' assets should be in these cheap ETFs. In his 2013 letter to Berkshire Hathaway shareholders, he wrote that the "long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers." 

Others believe that a more appropriate mix is 70% in stock market index funds. The remainder should be in a mix of bond funds, certificates of deposit (CDs) and money market funds. That could mean 20% in bond funds and 10% in CDs and money market funds.

Here are some of the benefits to these types of conservative retirement investments:

Stock market index ETFs have low fees and also pay out all the dividends they collect from the underlying equities. There are no capital gains taxes incurred until shares are sold.

Right now, the S&P 500 has a dividend yield of 1.4%. Moreover, the S&P 500's 12-month total return (price change plus dividends) is 23%. 

Additionally, investments in stock index funds have played out well over time. For example, the S&P 500 has averaged an annual total return of 15% over the past 15 years. Not too shabby.

Bond funds typically offer investors a lower return than index funds, but more peace of mind. Granted, the bond market has seen its fair share of volatility in recent years, but as Kiplinger contributor Jeff Reeves writes in his feature on the best bond funds to buy, "If you're at or near retirement and your biggest concerns are capital preservation and income, you simply cannot overlook bonds."

Investors can also gain exposure to the fixed-income market through bond ETFs, as well, which tend to have lower expense ratios than their mutual fund counterparts.

Keep in mind that bond funds fluctuate in price, just as stock funds do. Many investors don't realize, for example, that if interest rates rise over time, bond prices can decline. However, because of the inverse relationship with bond prices and yields, falling prices result in higher yields. 

On the other hand, if the general level of rates begins to decline, principal amounts will rise but investors could be left with lower monthly interest payments.

Certificates of deposit (CDs) are another way to safely grow your money in retirement, although one drawback includes having to tie up your money for the length of the certificate. Still, many CDs currently have yields that range well over 5%. For example, Bankrate reports that some of the best CD rates right now range between 5% and 6%.

Similarly, high interest is available from a mix of money market mutual funds. According to Crane Data, the 100 largest taxable money market funds tracked by the investment services firm currently boast an average yield of 5.15%. 

The bottom line 

The bottom line is that folks looking for the best conservative retirement investments will generally make steady returns in index funds that cover the stock and bond markets. The theory here is simple: As funds are drawn down for retirees' liquidity needs, the growth from being invested in the stock market and to some extent bond funds, can help counteract these drawdowns.

In addition, by keeping a portion of investments in semi-liquid and stable CDs and liquid money market funds, both which pay interest, retirees can meet their monthly and daily funding needs. Over time, the portion in liquid funds should grow for most retirees.

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A brokerage sweep account, sometimes called a core or settlement account, holds your uninvested cash. When you sell a security – a stock, mutual fund or exchange-traded fund, say – the proceeds are placed in the sweep account. And when you buy a security, cash in the account pays for the trade. It all happens automatically. 

But here's the rub: Some brokerage firms park your cash in accounts with good yields, while others put it in holding places with not-so-good yields. 

At Fidelity, for instance, cash in retail brokerage and retirement accounts sits in a money market mutual fund that yields a healthy 5.0%. Vanguard's default settlement account, a government money market fund, yields 5.3%. By contrast, Charles Schwab offers a choice of two sweep accounts. Both yield 0.45%. And E*Trade offers little choice – most customers land in a bank deposit program that currently yields 0.01% for balances of $499,999 or less. (All yields and data are through November 30, unless otherwise noted.)

Of course, sweep accounts are supposed to be temporary holding places, not cash management accounts. You can't write checks or pay bills from a sweep account, for example. "It's a settlement account, for the liquid cash you have at your brokerage," says Greg McBride, Bankrate.com's chief financial analyst. 

If your brokerage firm offers a government money market fund as its default sweep account, you probably don't need to worry about your settlement account yield or make a change. But if your brokerage account cash isn't earning 4% or better, it may pay to consider alternatives. 

Finding the right place for your idle cash isn't just about getting the best yield, however, says Peter Crane, president of money-fund-tracker Crane Data. Other factors matter too, such as how soon you plan to use your cash and how much of it you have. Keep these tips in mind before you move your money out of a sweep account. 

Know your options when it comes to sweep accounts 

Some firms let you choose a different default sweep account – a bank account, say, or a government-debt or muni-bond money market mutual fund. If your firm doesn't (and you don't like its default option), you'll have to move cash on your own to a competitive money market fund. 

Schwab guides investors who want to boost their cash yield to money market funds, including money funds that hold government debt or municipal bonds. The taxable money fund yields range from 5.06% to 5.25%, and they have no transaction fees or investment minimums. But you don't get instant access – the money will be available in your sweep account the next day if you sell shares in the money fund by 4 pm Eastern time.

Vanguard offers as a second option a bank sweep account called Vanguard Cash Deposit, which yields 3.7% as of August 31. But Jeffrey DeMaso, editor of The Independent Vanguard Adviser, a newsletter about Vanguard funds, favors the default government money fund over the cash deposit account, in part because the money fund offers a higher yield. 

Make sure your money is accessible 

Where you hold your money matters, depending on how you plan to use it. "Convenience is the most important factor," says Crane. Funds you want to put to work immediately in the event the stock market takes a dip are best held at the ready in your brokerage account, even if that's in a low-yielding sweep account. Otherwise, "you could miss a buying opportunity of a lifetime," says Crane. 

The caveat is how much money you're sitting on and how long you plan to hold it. If it's $100,000, $20,000 or even $10,000, a 5.0% yield over one year can be meaningful ($500 to $5,000). Unless you're planning to invest the whole pot in short order, it may be worthwhile to shift some of the cash to a higher-yielding money fund. 

Don't overthink money market funds  

The vast majority of money market funds invest in short-term government debt, says Crane, and "it really doesn't matter which one you pick." The two biggest are the Fidelity Government Money Market Fund (symbol SPAXX, expense ratio 0.42%, seven-day yield 5.0%) and the Vanguard Federal Money Market Fund (VMFXX, 0.11%, 5.3%). 

There's no minimum on the Fidelity fund. But the Vanguard fund requires a $3,000 initial investment – unless you're a Vanguard brokerage account customer, in which case there's no minimum. Just remember that if you invest in a money market fund outside of your sweep account, transfers may not be instantaneous. 

Don't obsess about yields in the same ballpark 

People tend to dither over choosing a fund with a 5.25% yield or one at 5.00%, says Crane. That's annualized. You'd have to leave the cash for 12 months to earn the full yield, and even if you do, the difference in earnings may not amount to much. Over the course of a year, for instance, you'd earn $1,050 on a $20,000 balance at 5.25% and $1,000 at 5.00%. 

That said, money market funds with yields that seem too high are a red flag. The Federal Reserve has set its short-term interest rate target between 5.25% and 5.50%. If a money market fund yields 6%, says Crane, "You have to ask yourself why. The fund may be taking on some added risk." 

All yields are net of fees and are annualized. Money market funds quote seven-day yields, and bank-issued money market deposit accounts and savings accounts cite annual percentage yield (APY), which includes the effect of compounding interest. They're calculated differently, so these yields "aren't necessarily apples to apples, but they're comparable," says Bankrate's McBride. "They're both projections on how much you'll earn over the course of the coming year." 

Skip municipal-bond-based money market funds 

Municipal debt generates income that is exempt from federal, and sometimes state, income taxes. But unless you're in the highest tax bracket, or you live in a high-tax state such as California or New York, "ignore them," says Crane. 

For starters, the yields on municipal-bond money funds tend to bounce around a lot. And the tax-equivalent yields on these funds aren't as enticing unless you're a very high earner. For instance, the 3.38% yield on the Vanguard Municipal Money Market Fund (VMSXX), the biggest retail fund, translates to a tax-equivalent yield of 4.44% for investors in the 24% federal tax bracket. But the tax-equivalent yield for those in the 35% bracket, including the extra 3.8% Medicare surtax on investment income that applies to certain high income earners, jumps to 5.52%. 

Consider Treasury bills for cash you won't invest right away  

These U.S. Treasury IOUs have maturities of less than one year (they're issued in four-week, eight-week, 13-week, 17-week, 26-week and 52-week maturities). Recently, one- to three-month bills yielded nearly 5.5% or more; four-month and six-month bills, roughly 5.4%. 

"This flexibility allows investors to potentially earn a higher return on their savings and still have access to their funds when needed," says Jonathan Bird, a certified financial planner in Phoenix, Arizona. 

You can buy them through your broker, typically for a minimum of $1,000. Or consider a T-bill exchange-traded fund, such as the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, 0.14%, 5.3%) or the iShares 0-3 Month Treasury Bond ETF (SGOV, 0.07%, 5.2%).

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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