A good mutual fund for a retired couple?

A question from Yahoo! Answers:

Is there a best Mutual Fund for a retired upper middle classed couple?
On a scale of 1-10 we’re willing to take a #5 level risk.

First of all, the fact that you are WILLING to take a medium risk doesn’t mean that you are ABLE to do so. To be able to take this medium-level risk, you need most of your income needs taken care of, with the proposed investment filling in the variations in spending gaps from year to year. Is this the case?

Provided that it is, I would suggest investing in two funds rather than one. Medium-risk portfolios should have a healthy mix of stocks and bonds. There are funds that invest in both stocks and bonds (usually called “balanced funds”), but they typically lag two-fund baskets (stock fund + bond fund) in performance. Additionally, when you invest in balanced funds, you give the fund manager control over how much of your money is invested in stocks vs. bonds. With two funds, you can adjust your allocation as you deem necessary.

And, to answer your question, no, there is no such thing as the “best” mutual fund. There are some good ones, but even good managers make mistakes and underperform every once in a while. Also, even good (i.e., performing better than benchmarks) funds can be a losing proposition if you invest in them at a bad time. For example, today’s interest rates and corporate spreads are low by historical standards and are more likely to go up than down. What is means is that for the next few years, you should stay away from funds investing in long-term bonds (especially corporates) and keep to the short end of the yield curve.

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