Listed below are the best retirement investments for 2018 by category based on various companies and advisors’ opinions. Optimizer’s know that I recommend the triad portfolio allocation, which is a mixture of risk free, core, and alternative investments. Whether you invest in individual stocks, index funds, or actively managed funds, you should make sure your money is in investments that won’t bankrupt you.

Best Index Funds for 2018

Warren Buffett recommends most people would be simply best to purchase an index fund that tracks the S&P 500. This works great for the stock allocation part of your portfolio. You may not want to have all your money in stocks, especially if you’re nearing or in retirement. Here are the best index funds that track the S&P 500:

1) Vanguard 500 Index Fund Investor Shares (VFINX) – Bogleheads delight in this low-cost diversified index fund that tracks the broad market. That’s why Vanguard made my retirement tools list for best fund company in 2017. There’s been fierce competition by T Rowe Price, Fidelity, and Schwab, all of which have been taking a chainsaw to fees over the last couple of years. As you can see from the chart below, the 10-year return is 7.31% and I believe that’s probably a good expected return for the next 10 years. The stocks market is high by all measures but especially the CAPE ratio and investors shouldn’t expect high returns going forward.

VFINX best index fund 2018VFINX legend

 

2) SPDR S&P 500 ETF (SPY) – This exchange traded fund tracks the S&P 500 too. You can buy shares in SPY through any brokerage account just like you’re buying a stock. It’s different than the Vanguard 500 Index Fund in this way. But its results are almost identical as you can see in the chart below (note: see quarter end as of 9/30/2017). The 10-year return for SPY is 7.33%.

SPY performance

Best Actively Managed Stock Funds for 2018

I’m not a big fan of actively managed funds in comparison to index funds. However, investors still put money into actively managed funds so it’s worth showing some of the best retirement investments for 2018 below.

1.) Dodge & Cox Stock Fund (DODGX) – I read Kiplinger’s magazine as a kid and they’re still putting out their recommendations for the best actively managed mutual funds. In fact, they’ve been writing about stocks and funds since the 1950’s. Any publishing company that’s been around that long do the same thing is worth listening to. I combed through their list and picked out the fund this is great for retirees. One of those is Dodge & Cox Stock Fund. Take a look at their top ten holdings as of September 30, 2017:

top ten holdings DODGX

DODGX is heavy on financials as of late which is one reason they’ve walloped the market over the last year. We don’t much care about short-term performance here at Optimize Your Retirement. We want stocks and funds that hold up on over the long term. You won’t be disappointed with DODGX over the long term either. Take a look at their performance record compared to the S&P 500:

DODGX performance

DODGX has a very low expense ratio of 0.52% and a portfolio turnover ratio of 4%. They keep their cost low and don’t trade excessively: two key things that retirees should focus on.

2.) T. Rowe Price Dividend Growth Fund (PRDGX) – This is one of my favorite actively managed mutual funds and as the name implies, they invest in mostly companies that pay and grow their dividends. Dividend growth stocks are my favorite because the power of dividend growth over the long term is second to none. Here’s a list of their top 10 holdings as of October 31, 2017:

PRDGX top ten holdings

PRDGX has an expense ration of 0.64% which is in-line with some of the other big fund companies for similar dividend growth funds.  PRDGX’s Vanguard competitor, VDIGX, has a lower expense ratio but also lower returns. T. Rowe Dividend Growth Fund’s performance chart is listed below. Their one-year performance is lacking but over the long term beat their Lipper benchmark.

PRDGx performance

Best Actively Managed Bond Funds for 2018

Man do bonds get a bad wrap – and rightfully so. Bond yields are extremely low and as interest rates rise bonds will take a beating. There is a sweet spot in bonds however and that lies in bonds that have a duration of between 2 – 3 years. Duration tells you how long the bonds have until maturity and also gives you expectations as to how much your fund will drop if interest rates go up. A 1% increase in interest rates on a 4% coupon 5-year fixed rate bond would lower the value of the bond by 4.4%. A 1% increase in interest rates on a 30-year fixed rate bond would lower the value of the bond by 15.5%

interest rate see saw

1) Vanguard Short-Term Investment Grade Investor (VFSTX) – This fund invests in corporate bonds rated BBB or better as well as Treasuries and mortgage-backed securities. This fund has a duration of 2.6 years which falls right in our sweet spot. You’ll get a yield of 2.15% and the interest rate risk is low since the duration is under 3 years. The expense ratio is ultra-low at 0.20%. You can see their holdings by issuer below:

Vanguard Short-Term Investment-Grade Fund Investor Shares

2) PIMCO High Yield Fund (PHIYX) – This fund works for those retirees who need to get more aggressive on the bond side. Pimco’s high yield fund invests in higher quality non-investment grade bonds and not in speculative bonds. The fund’s effective duration is 3.1 years. You’ll get a yield of 3.78% with an expense ratio of 0.56% You can see their holdings by issuer below:

best investments for 2018

 

The risk here is higher than the Vanguard fund but also has a higher reward, so you’d expect this fund to outperform in normal markets but under perform in a recession.

Best Individual Stocks for 2018

1.) McDonald’s (MCD) – The folks over at Value Line like McDonald’s. They say that earnings will grow at 9.5% per year over the next 5 years, with most of the growth coming from China. I think it’s a bit expensive at the moment but would be a buyer at any pullback in the stock. I think that McDonald’s should be part of every retirees individual stock portfolio. The stock currently yields 2.3% and has been really strong over the past year. This strength is likely to continue. Even if the U.S. enters a recession, McDonald’s is somewhat recession proof because of the type of product they sell.

2.) McKesson (MCK) – Preston Pysh of The Investor’s Podcast likes healthcare company McKesson. Here’s a copy of Preston’s analysis which he emailed to me on 11/3/2017. Preston thinks it’s undervalued based on his discounted cashflow analysis. I agree. The stock looks cheap at these levels. McKesson currently yields about 1%, less than I typically like for a dividend stock, but you have to look at the whole picture. The stock is cheap and appreciation will likely make up the majority of your returns going forward. They’ll also be able to increase their dividends paid to shareholders much faster than other companies.

3.) Realty Income (O) – Realty Income is one of my favorite REITs because of how it’s managed. Management truly puts shareholders first. They pay monthly dividends and increase their dividends paid to shareholders every year. Increases are small but the strength of this company will endure. Dividends (current yield 4.5%) are paid on or around the 15th of each month for those shareholders as of record at the end of the previous month.

I sold Realty Income when it got into nosebleed territory back in the summer of 2016 however have since repurchased shares around $55 a share. Realty Income trades similar to a bond because it’s sensitive to interest rates. If it drops as broad interest rates rise, I’ll keep putting money into this best of breed real estate investment trust. Those investors who buy shares in O and hold for 5+ years will not be disappointed.

Full disclosure: I’m long MCD, MCK, and O.

Conclusion

The best retirement investments for 2018 are all investments that have a proven track record and low cost / good management. Retirees should avoid chasing the next big thing because that will probably end up ruining their portfolio. The funds and stocks listed in this best investments list have proven their worth as an addition to your portfolio. Please let me know in the comments below if you have other investments that you think are great for retirees in 2018.

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