Fund Classification

While some portfolios (funds) consist of corporate stock exclusively, others consist of bonds exclusively. Mixed funds consist of both bonds and stocks, refer to the table below.

Funds are typically classified as either aggressive or passive. That's a little joke. Funds are typically classified as either aggressive or conservative. Aggressive funds tend to fluctuate more than conservative funds. The fluctuation is equated with risk. Aggressive funds are thought of as "risky" investments relative to conservative funds. The risk associated with aggressive funds is tolerated because they normally offer a higher return relative to conservative funds. Conservative funds tend not to fluctuate as much as aggressive funds; thus, they are perceived to be safer than the aggressive funds. Conservative funds offer lower returns in exchange for perceived safety. Apparently, aggressive investors will tolerate a wild roller coaster ride for a higher return, while the conservative investors accept lower returns for a safer merry-go-round ride. We suggest ignoring the strange aggressive and conservative fund classification completely. 

A far more logical fund classification links the fund's class with the investor's investment time horizon, as defined in the table above. Do not think conservative funds are safe and aggressive funds are risky. The only risk in the stock market is market risk. Investors must manage this risk with time. 

Do not invest in the stock market unless your investment time horizon is at least 7 years. Notice the bond fund is the only fund class that is designed for short-term investing. Bond funds and other short-term cash generators must be used if the investment time horizon is less than 7 years.

Every long-term investor has the same goal:

Generate the most unearned income as possible!

With that said, why would a long-term investor purchase shares of a fund that has both bonds and stocks? The mutual fund industry has created three investment time horizons, short-term, intermediate-term and long-term. They have created funds to match each time horizon, refer to the table below.

Mutual fund companies created conservative and index funds for the intermediate investment time horizon (3-5 years). These funds give the investor a false sense of security. Stocks can depreciate significantly over the intermediate-term which means investing in stocks over this time frame can result in losing money. Mixed and index funds both contain stocks. They will not fluctuate as much as aggressive funds, however, they can depreciate significantly over a 3 to 5 year period (lose money). As a result, all funds that contain stocks are risky over the short and intermediate term. The mutual fund industry created mixed and index funds for people that want to invest over the intermediate-term which is very risky. Period!  Remember, there is only one low risk investment time horizon associated with funds that contain stocks: long-term (at least 7 years)! Long-term investing greatly reduces the risk of experiencing a loss from purchasing funds that contain stocks. Therefore, do not think mixed or index funds are safe intermediate-term cash-generators. 

If your investment time horizon is not at least 7 years, do not invest in a fund that contains stocks. The shorter the investment time horizon, the greater the risk of losing money.

Choosing a fund can be a very challenging task. Fortunately, the task is simplified by defining an investment time horizon.

If your investment time horizon is less than 7 years, invest in bond funds or other short-term cash generators. If your investment time horizon is 7 or more years, invest in aggressive stock fund(s). Ignore conservative funds, they are not safe over the short-term, and they do not generate a high return over the long-term.