Over the long haul, stocks have always beaten bonds and cash by wide margins. But Europe's sovereign debt crisis has robbed the U.S. stock market of its momentum. Europe could well suffer a double-dip recession, which would hamper the U.S. economic recovery.
With that in mind, I offer my seven top mutual fund picks for the second half of 2010, as well as the percentage of your assets I recommend investing in each. If your time horizon is long and your risk tolerance great, you may want to raise the percentage of assets in the stock funds and lower your allocation in the bond funds. If your horizon is short or your tolerance for risk low, consider doing the opposite.
The proposed portfolio concentrates money in large-company growth stocks and emerging-market stocks. It also employs a market-timing fund and two unusual bond funds.
Large-company growth stocks are the sweet spot in this market. They're cheap relative to historical valuations, and the companies hold record amounts of cash on their balance sheets. In addition, they can grow even as the world's developed economies stagnate, as most do business in faster-growing emerging markets.
I'm talking about stocks such as biotech Amgen (AMGN, news, msgs), Internet search giant Google (GOOG, news, msgs) and drug-maker Eli Lilly (LLY, news, msgs), three of the top holdings in the Primecap Odyssey Growth (POGRX) fund.
In the five years through June 28, the fund returned an annualized 3.9%, compared with an annualized 2.4% loss for the Standard & Poor's 500 Index ($INX). You should put 20% of your money into Primecap.
I'd invest 15% in Fidelity Contrafund (FCNTX), managed by William Danoff, one of the few who have thrived for decades in Fidelity's cutthroat environment. Contrafund also focuses on large-cap stocks, but it's managed a bit more conservatively than Primecap Odyssey Growth.
If you want a more compact portfolio, put 35% of your money into Primecap or Contrafund.
Emerging markets are maturing rapidly. Yes, they face enormous problems in corporate governance and in their political systems. Surely, some of them will implode. But emerging nations are growing more quickly than developing countries, and their fiscal houses are largely in order. The developed world, by contrast, remains awash in debt.
Continued: Some recommendations
