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Market takes investors on a wild ride

Jitters in Shanghai jangled markets worldwide last month – a wake-up call for investors to keep a closer eye on the downside.

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Mutual fund investors may be excused if their knees are knocking a bit.

While the year didn't begin with high hopes on Wall Street, the first quarter's roller-coaster markets gave investors a jolt. After a smooth ride for nearly two months, a dramatic plunge in the inflated Shanghai stock market sent shivers through world equity markets, pulling down riskier assets leveraged with debt. In the United States, the sell-off was amplified by investor fears that the troubles in the subprime residential mortgage market would aggravate a home-building slump that appears far from over.

Financial stocks were hit especially hard, reflecting concern that rising mortgage delinquencies and deterioration in credit quality might spread to other types of lending. While stocks partially recovered in March, the major market indexes struggled to stay in positive territory.

The increased market volatility is "a wake-up call for investors who had become notably complacent about investment risks," says James Stack, editor of Investech Research, an investment advisory service. A five-year bull market that hasn't had so much as a 10 percent setback should furrow brows among prudent investors, he says.

With an economic slowdown looming, oil prices rising, and a Federal Reserve that has not softened its anti-inflationary stance, investors should focus more on preserving capital than reaching for short-term gains, Mr. Stack says.

Despite wide day-to-day price swings, all major fund categories scored modest gains for the quarter (see PDF or Flash chart). US diversified stock funds rose an average of 2.1 percent, according to fund-tracker Lipper. While value and growth styles ran neck and neck in the first quarter, mid-cap funds – which hold mostly companies with market capitalizations in the $3 billion to $15 billion range – were the cream of the crop. Mid-cap value funds rose 4.4 percent, while small-cap value counterparts rose 2.6 percent. Large-cap growth funds, market laggards since the Internet bubble burst seven years ago, eked out a 1 percent rise, slightly better than large-cap value funds.

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