A time to balance, not quit, your mutual funds
THE lunging bear market left no investment vehicle unscathed, including the fastest-gaining mutual funds. The typical fund lost more than 16 percent between Aug. 25 and Oct. 26, and the average stock fund slipped 24.5 percent, doing slightly worse than Standard & Poor's average, and not much better than the Dow Jones industrial average, which lost 25.43 percent.
But ``when things are down, it's generally the time to buy, not sell,'' says Reg Green, editor of the Mutual Fund News Service, in San Francisco.
``If you're in mutual funds now, stay in,'' Paul Simmonds agrees, research head at the Institute for Econometric Research in New York. As do other analysts, he expects the bull market to resume, and says those already invested in funds should ride out the market's bucking.
As an illustration of what not to do, Mr. Green points out that at the end of September, when bond funds were slipping, many people began moving out of them into money market and stock funds. They wound up losing even more when the stock market plunged halfway through October, he says.
``But if you're willing to take risk and hold on for a long time, you can recoup, and recoup very, very handsomely,'' Green says.
During the bear market that ran from the end of 1972 to September '74, for example, one of the top performers of all funds over the years, the Weingarten Fund, fell 57 percent. The Standard & Poor's average fell 43 percent in that time. After the market rose, however, Weingarten moved back up and had gained an incredible 595 percent by the end of 1980, compared with only 185 percent for the S&P.
This is also a good time for short-term municipal bond funds or Ginnie Mae funds, says Brian Mattes, vice-president at the Vanguard Group. Yields are attractive relative to current levels of inflation, he says, and bonds are ``a safe haven'' as the Fed loosens the money supply.
At the Strong Funds in Milwaukee, exposure to common stocks was drastically reduced in both the Investment and Total Return funds before Oct. 19, says William Corneliuson, chairman.
Anticipating the market decline, though not its severity, management moved about 25 percent of the Total Return Fund's assets to bonds, 33 percent into the common stock of ``everyday'' companies, and 42 percent to cash equivalents. Mr. Corneliuson says investors should be looking for this kind of flexibility, as well as a measure of safety, in all their investments. Balanced funds, which can move in and out of stock, bonds, and cash, can do well in both bear and bull markets, says Alexandra Armstrong, president of Alexandra Armstrong Advisors in Washington.
``It's what we've said all along,'' says Michael Hirsch, vice-president and chief investment officer at the Republic National Bank of New York. ``The proper way to play the game is to stay as diversified as possible.''
``Balancing ... that'll be the rallying cry for 1988,'' says Mr. Mattes. ``That advice wasn't too well received when all the action was in stocks ... investors may have a more realistic approach to the market now.''
The value of diversity became acutely obvious to many investors, especially those with a stake in 44 Wall Street Equity. It fell about 55.99 percent to become the worst-performing fund as of Oct. 26. Fidelity's well-known Magellan Fund also dived, going from $10.8 billion to $7.56 billion in assets. Other funds with a lot of money in equities got into trouble, too, and those funds based in gold, small company growth, and science and technology stocks slipped with the market.
Funds invested in overseas stocks or fixed-income investments, on the other hand, came out ahead. Oppenheimer's tiny Ninety-ten led the pack, with a whopping 38.57 percent leap, followed at quite a distance by Transatlantic Income's 7.85 percent gain.
Analysts tend to think the market's big plunge has been a good thing, bringing many investors to their senses as others were brought to their knees.
After ``Black Monday,'' many investors began reevaluating their positions and strategies, and getting out of high-risk funds. ``Average investors have been putting themselves into portfolios that are too aggressive,'' says Donald Rugg, president of Charlesworth & Rugg Inc., a money management company in Woodland Hills, Calif.
There has already been a shift into money market funds, which grew by more than $10 billion in the last two weeks of October. Analysts say investors should be asking themselves:
Is this an appropriate fund to be in? Are the kinds of things it invests in likely to do well in the recovery period? Normally in a recovery, big, high-quality companies seem to do better, because when confidence is shaken, people run to the tried and true.
Is this fund appropriate for me? If you like more risk, with the thought of having a bigger rate of return in the end, you might prefer to go into a fund that has more stocks, or even one with more stocks in small companies, the average of which goes up about 13 percent each year, as opposed to blue chip companies that go up about 10 percent each year.
Do I want a load or no-load fund. When stocks are going up, ``you can rationalize all sorts of charges,'' says Sheldon Jacobs, editor and publisher of the No-Load Fund Investor in New York. In a declining market, however, higher expenses take a larger toll on earnings, especially when you have to pay for losing investments.
For investors who can handle more risk, and want to take advantage of some market bargains, analysts call the looming recovery extremely bullish and suggest buying into funds that are highly volatile relative to the market, or track the market very closely. ``They promise to be among the best performers,'' says Mr. Jacobs.
In general, though, ``the same sort of fundamental golden rules that applied before will apply again,'' says Green at the Mutual Fund News Service. While funds based in mixed assets don't gain as much from huge market upswings, they are the least damaged by big falls.
Being able to switch in and out of funds is still important, but analysts say diversity remains the key. When the market dips, it's too late to pull out, says Mattes at Vanguard.
In a five-year bull market, though ``greed takes over, people forget the risks involved, and all they see is potential for profit,'' says Jacobs. Many investors had borrowed on margin to make investments that weren't thought out that well, he says. ``You shouldn't do it if you can't afford to lose it.''
Perhaps an even bigger mistake, though, he says, is ``getting out when I get even. Eventually, the market will go on to reach new highs ... those who get out will be sorry.''