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Investors Get Richer, and the Plot Gets Thicker - What to Do Next?

Mutual Funds

The US stock market sizzles, setting records and making mutual fund investors richer by hundreds of millions of dollars every month.

But not all investors share equally.

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Funds designed to mimic the Standard & Poor's 500, a broad measure of stock market performance, have soared, as have other funds that invest in large, well-known companies. Yet most funds, more than 90 percent, haven't kept up.

So what do you do now? Financial experts say some prudent moves can keep you, or put you, on track:

Sit back and smile. For now, the consensus sees both optimism and markets continuing their record-setting ways.

"Bullish conditions will last awhile longer," says Sung Sohn, chief economist at Norwest, a bank based in Minneapolis, driven by new money from domestic and foreign investors, as expectations continue for low inflation and solid profits.

There is nothing on the horizon to take "the punch bowl away from the party," Dr. Sohn says. One exception would be a boost in interest rates next month, but he doesn't expect that. Rates may rise later this year.

Rebalance and diversify. Because of huge stock gains, many individuals have veered away from their intended stock/bond balance and could face sharp losses if the bull market turns tail.

"A person may have intended, for example, to have a balance of 60 percent stock funds and 40 percent bond funds. But with the run-up in equity prices this year, stocks may now account for 75 percent," says Eric Kobren, publisher of Fidelity Insight and FundsNet Insight, newsletters about Fidelity funds and the fund industry.

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Mr. Kobren would stay in equities, but cut portfolios back to original goals - such as 60 percent stocks, 40 percent bonds.

And since large-company stocks have risen the most, he would increase the weighting in funds owning small or mid-size companies. He also likes real estate and bond funds.

Is there a danger of being too conservative? Kobren concedes that he may have been a little more defensive than was warranted when the market fell in April. But it is crucial to "not see the past two [stellar] years as the norm."

Seek high-quality funds. A Latin fund may spice up your portfolio, but analysts say most of your money should go into mainstream funds.

One of this year's top 20 stock-fund gainers invests in blue-chip companies. Yorktown Classic Value Fund (800-544-6060) is up 32 percent as of June 13.

"It's a well-kept secret," says manager David Basten in Lynchburg, Va. He looks for underpriced companies. The biggest of his 33 holdings now are copper miner Phelps Dodge, railroads CSX and Norfolk Southern, Boeing, and FMC, a maker of chemicals and machinery. The fund's entry minimum: an affordable $500.

Some analysts also like the following funds at the two biggest fund families, Fidelity (800-544-3902) and Vanguard (800-662-7447):

* Fidelity Puritan Fund, a balanced (stock and bond) fund, is up 14.6 percent through June 17.

* Fidelity Growth & Income Fund is up 18.2 percent.

* Vanguard's flagship S&P 500 fund is up 21.7 percent.

* Vanguard Windsor II fund, an equity fund, is up 17.5 percent.

* Vanguard Growth & Income Fund is up 20.1 percent.


Tim Schlindwein, a financial planner and mutual fund consultant in Chicago, says that in a booming stock market, individuals should keep their focus on the basics:

* "Diversify your portfolio to protect against market risk." You might start by choosing a growth-and-income fund, an index fund, an overseas fund, and a bond fund. More-specialized funds can be added around those.

* A simpler way of easing risk is a balanced fund, which includes bonds as well as stocks. But so far this year, these have underperformed growth-and-income funds - which generally invest in large, dividend-paying stocks.

* Have a clear picture of your long-range financial goals. Perhaps you are saving for a home, your children's college tuition, or for retirement. Different goals favor different types of funds. For example, if you are in your 20s or 30s, you will probably want a more aggressive plan - favoring growth funds - than someone closer to retirement.

* Rebalance your portfolio to match your desired weightings of stocks and bonds. Do this at least once a year, or more often if market conditions, such as this year's big gains, create imbalances.

* Invest for the long haul. But if a fund clearly underperforms over time, reconsider it. Investing for the long term doesn't mean hanging onto losers. Your objective, he says, is a steady profit.

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