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A few weeks ago, I reviewed the book The Complete Guide to Investing in Index Funds by Craig Baird. It is an interesting and useful book. More recently, Craig was kind enough to answer a few questions I put to him via email. Here are his answers:

1. What are some of your favorite index funds?

I wouldn’t say I have a favorite one, but I am a big fan of investment funds that match my own morals. I like the FTSE4Good U.S. Select Index because they list the companies that match environmental and human right criteria. This way you know that the index fund you are investing in, and by extension the companies, are helping to make the world a better place. As well, with the push for going green growing around the world, a lot of these companies are becoming world leaders with consumers and have nowhere to go but up. The Domini 400 Social Index is another that I like as they do not list any companies associated with alcohol, tobacco, nuclear power, the military, firearms and gambling.

2. Do you prefer index funds over ETFs?

Well both ETFs and Index Funds have similar advantages including low-risk and tax efficiency, and can be good investments but I am a bigger fan of index funds. It is argued that ETFs represent only short-term speculation, and the expense of trading decreases the return to investors when compared with index funds. Those who work with index funds feel that there is not enough diversification in ETFs when compared with index funds. I personally feel that index funds are a safer investment, especially in tough economic times.

3. Do you recommend an all-index fund portfolio?

This really has to do with the individual investor. While an all-index fund portfolio can be good because there is low-risk, but low-rewards, it may not work for everyone. If someone is in their 50s or 60s and wants to get high returns for their portfolio to fund their retirement, then they may not get the rewards they want out of index funds. However, if they already have a lot of money in their portfolio and just want to slowly add to it, then an all-index fund portfolio can work for them. Young investors may not want an all-index fund portfolio because while they have a long time to build their portfolio finances, they may want to take some higher risks because they have a greater amount of time to rebuild in the case of a bad investment. I think it is good to diversify. If you are a high-risk investor, then perhaps make only part of your portfolio focused on index funds, with the rest invested in stocks, currencies, mutual funds, etc… The really adventurous and knowledgeable investor may want some index funds, especially if they are investing in junk bonds. If you want to be conservative and just bring in a little amount of money with little risk, then perhaps an all-index fund, or nearly all index fund, portfolio may be a good fit. That all being said, you do not want to put all your eggs in one basket, even if it is index funds. I would always ensure there is diversification in any portfolio, with the amount of index fund makeup in it varying from 30 percent for high risk investors, to 80 percent for conservative investors.

4. How would you invest in a recovery?

This is a good question as a lot of people are wondering about it. Personally, and this may work for me and not others, I would invest in index funds heavily in tough times because you are not trying to beat the market with index funds, but mirror it. It is pretty much impossible (or nearly) to beat the market because all the information relating to a stock immediately affects the price of the stock, so there is no legal way of getting a jump on things, so much of it is chance. If one was to invest in stocks, then investing in the stocks of companies that traditionally do well but have lower stock prices because of the recession would be a good bet because they will go back up eventually. I would also invest in renewable energy companies. A large portion of the stimulus package created by the government is being used to create green jobs and to push renewable energy. A lot of these companies are going to see very fast growth in the coming years I think.

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It’s Halloween time, and in honor of Halloween, I thought I’d share 3 scary investment strategies:

1. Following that “hot tip”:  How often do we hear about a “hot tip” from someone that is just solid and will make you a great deal of money? However, just running after something that is “hot” is rather scary. By the time you get the tip, chances are that the things have cooled off. Indeed, in many cases, by the time you get in on the “hot” buy, it’s close to the top, and about to fall. Plus, who’s giving you this tip anyway?
2. Frequent trading: While there are lots of people who make money with day trading, I find the whole thing rather scary. I’m more of a boring buy and hold kind of girl. Frequent trading can have tax implications (short-term gains are charged at a higher rate than most long-term gains), and frequent trading can cut into your gains with transaction fees.
3. Market timing: Accurately predicting the market is impossible, so market timing is a tricky prospect. Waiting until just the right time buy can cost you, since you might miss a low. But what happens if you jump out just before something takes off? While there is no way to completely protect your portfolio, you can protect it to some degree by using a regular investment plan (such as dollar cost averaging to invest each month) and riding through the ups and downs. You may not get the same spectacular gains, but there’s a better chance that you’ll get steady gains over time.

What investment strategies do you find scary? Also, in honor of Halloween, I thought I’d share this video of Disney villains singing about money. Enjoy!

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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One of the more heated debates that goes on in the world of income investing is whether stocks should be favored, or whether bonds should be the investment of choice. As always, what you do depends on your personal situation, and what you are comfortable with. A financial professional can also help you chart your course. But it does help to take a look at some of the basics of bonds and stocks when trying to make your decision.

Bonds

Bonds are considered safer than stocks. They are normally fairly reliable, especially U.S. government bonds. Even some corporate and municipal bonds are reasonably reliable (while offering higher returns than Treasuries). Unfortunately, bond returns are relatively low, to go along with this lower risk. In many cases, your income from bonds is eroded by inflation. On top of that, right now bond interest is taxed at your income rate — which means that between taxes and inflation your income could be very low indeed. Investing in TIPS can actually help you combat the effects of inflation, though.

Stocks

The Motley Fool points out that over time, stocks outperform bonds in most cases:

Over long periods, stocks have outperformed bonds. Period. They have done so more than 95% of the time in the 20-year periods between 1871 and 2006.

Another valid point is the fact that there are dividend-paying stocks that provide even more income on top of returns from stock increases. Dividends are also taxed at a lower rate, capping out at 15%. (Buy and hold investors can also enjoy the the tax efficiency of long term capital gains.) And if you use DRIPs, you can reinvest your dividends free of charge — it’s like using free money to buy more shares. You can adjust this down the road as you need the income.

In the end, some diversity in your holdings is a good thing. But don’t be so concerned about the stock market that you overweight your investment portfolio with bonds and neglect the advantages that can come your way through stocks.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.