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Mutual funds: A ride reserved for the strong at heart

The first quarter of '08 witnessed many investors shifting from stock- to money-market funds. They may miss out on a recovery.

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If you feel as though your investment portfolio is in a free fall and now is time to pull the rip cord, you've got plenty of company.

Not many mutual-fund investors were able to remain aloft during the first quarter's stock-market plunge. But analysts warn those still invested in the market to consider riding it out.

Returns from diversified US stock funds fell by 10.1 percent, their biggest quarterly drop in nearly six years, according to fund-tracker Lipper Inc. Nor did international stock funds, whose popularity has mushroomed in recent years, provide a safer haven. World stock funds shrank by 9.6 percent. Those losses would have been even larger were it not for the weakening US dollar, which produces currency-translation gains in foreign investments.

Only two types of stock funds showed any buoyancy: short-bias funds and gold funds. Short-bias funds use hedging strategies that profit from declining markets. The strength of gold funds reflected investor concerns over a flare-up in inflation and the dollar's erosion. All told, less than 4 percent of some 12,700 stock funds tracked by Lipper posted positive returns in the first three months of this year.

Beginning in early January, stock funds tumbled across the board, driven by severe stresses in the US credit markets. A laundry list of woes engulfed the economy, including major mortgage debt write-downs by leading banks and record oil prices. From its peak last October, the S&P 500 fell more than 15 percent before stabilizing toward the end of the quarter.

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