Mutual funds: As Dow wavers, what should small investors do?
The Dow dipped below 10000 Wednesday morning, weighed down by unfavorable economic reports. A look at the options for investors in mutual funds.
For investors in mutual funds, these are trying times. The standard professional advice is to stick mainly with stock funds through thick and thin, but that can be hard to do. Especially during "thin" times like these.
Durable-goods orders for US manufacturers came in weaker than expected, and new-home sales fell to a record-low pace.
As recently as early May, the Dow was above 11,000. The stock market had performed well for a year, although it was still well below its pre-recession peak.
Even when stock prices were rising in 2009, Americans weren't pouring money into stock mutual funds. Although many retirement-plan investors have continued unfazed with their long-term strategies, on balance mutual-fund holders have generally been downsizing their exposure to stocks since 2007 and beefing up on staid bond funds.
What's going on? And what does it mean for small investors?
At a minimum, the pace of the economy has cooled in the past couple of months. That has caused economists to ratchet down their growth forecasts, and stock investors have joined in by scaling down their expectations for corporate performance. At worst, it could signal that the gross domestic product (GDP) will shift into reverse gear, actually declining for a time later this year.
That's the feared "double dip" recession scenario.
Against this backdrop, some indicators show investor optimism fading. For example, a gauge of the mood of wealthy investors, who are among the big holders of mutual funds and exchange-traded funds, fell this month.
The Spectrem Group's latest Millionaire Investor Confidence Index, released Wednesday, fell by 11 points. That's its biggest one-month drop in a year. The move, rooted in concerns about the political climate and unemployment, brings the index into what Spectrem calls "mildy bearish" territory. (The index had been giving neutral readings on the market for about a year.)
As for investors with smaller nest eggs, the advice from professionals is mixed, and the variation hinges partly on the investor's time horizon.
If you're saving for a relatively short time period, certainly if it's less than five years, stock funds are always a risky place to be, financial advisers say.
Still, financial advisers generally see stock funds as the core of a long-term savings plan for retirement, even if the Dow is synonymous with doubts for Americans at the moment.
Vanguard, one of the largest mutual-fund companies, found that during the mayhem of 2008, most of its investors stuck to their game plan. Only 2 percent pulled out of stocks entirely. And the number of people who made any adjustment to their portfolio was only slightly higher than in 2007.
In some cases, investors have been pulling money out of the market due to feelings of necessity, not mere worry. Fidelity Investments reported last Friday that borrowing and "hardship withdrawals" from its 401(k) investors have increased. About 2 percent of account holders took hardship withdrawals in the second quarter, and 11 percent initiated loans from their 401(k) over the past year, Fidelity said. In both cases, those numbers reflect a small increase from tallies in prior years.
The investment-strategy committee at Standard & Poor's, which makes relatively short-term forecasts of the stock market, currently expects the S&P 500 stock index to rise over the next 12 months to 1190. On Wednesday, the index stood near 1045. But S&P warns of "heightened volatility" and "recommends that investors tread cautiously."
S&P currently recommends an allocation of 55 percent stocks (lower than its normal view), 30 percent bonds, and 15 percent cash instruments such as money-market funds.