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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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One of the questions that many people have when it comes to look at how much return they are getting on their bonds has to do with the way the information is presented on the Savings Bond Wizard offered by the Treasury Department. One point of confusion has to do with the way I-bonds are presented, especially with regard to the term “yield.”

When the Wizard uses the term “yield”, it is referring to the average rate of return up to the present point. It is not actually referring to the current yield on an I-bond. It means the average rate of return up to the current point, over the life of the bond. When you see the “rate”, though, it means the current six-month period rate. I-bonds have two different rates, with a fixed rate for the life of a bond, and the inflation rate, which is adjusted in May and again in November of each year. So, if the current rate is higher than the yield, it is an indication that the rate is up in comparison to the average yield you have had over the life of your I-bond.

An I-bond is just one of the Treasury bonds available for investing. These are loans you make to the government, and the government pays you interest. I-bonds are protected from inflation. You can purchase them through Treasury Direct. It you use an electronic account, you only need a minimum of $25 to get started. Bonds offer relatively low returns, but they aren’t too bad. The current rate on I-bonds is 3.36% through the end of April — not too shabby for such an investment.  Better than a high yield savings account.

Bonds can make a good addition to an investment portfolio in need of a little shoring up for safety, but it is important to realize that you will get slow growth on bonds, and that if you want higher returns, you will need to balance things with other types of investments.

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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Investors are enjoying some optimism in early trading today as they greet positive economic data with enthusiasm. The U.S. stock market is moving higher today, across the board, as investors react to reports that the U.S. economy expanded in the third quarter of 2009, signaling the technical end to the recession. Credit is being given to economic stimulus measures that helped start some economic activity.

MarketWatch reports on the enthusiasm some have for the economic stimulus measures:

“While it’s far too early to declare ‘mission accomplished,’ it is crystal clear that the Recovery Act was crucial in pulling the economy out of its tailspin and putting it on the path to growth,” said Josh Bivens, an economist for the Economic Policy Institute.

Clearly, though, there is a long way to go. The economy needs to be able to continue to move forward with recovery without additional stimulus from the government. Also, there are concerns about employment. This is having a somewhat restraining effect on what could have been a runaway rally today. But, since employment is showing a slight improvement this week, and since lack of jobs helps company bottom lines in terms of cost cutting, this is probably not going to have a huge impact — at least for now.

Buying stocks

Obviously, the time to buy stocks was months ago. But with the economy heading higher, there is still time to get some good bargains. It is a good time to look for solid income investing stock opportunities, as well as choosing some good fundamentally sound investments that are likely to grow. Many people are also deciding to get into index funds and ETFs right now.

For those that have increased their contributions to investment accounts during the recession, it might be time to consider backing off a bit now that you can’t get as much for your dollar. Although, if you can afford to keep putting in higher amounts, it’s probably still worth it.

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.