Turning the New Year Into a Profitable One
This waning year is practically assured a place in the history books as a very good one for investors. Barring last-minute surprises, the average stock mutual fund will finish with a gain of about 24%, and the typical bond fund will advance roughly 16%.
For both stock and bond funds, those returns are much better than normal, which suggests that investors will have to work a little harder and muster more common sense and discipline to make money in 1992. Here are 10 easy-to-follow resolutions that might help you succeed with mutual funds in the New Year:
* Keep realistic expectations. Don’t sway from your long-term investment program if profits prove a bit harder to come by in ’92. And don’t be tempted by high-risk funds in an effort to earn 1991-style gains. Historically, stocks have returned about 10% a year on average, and only about one year in seven sees as strong an advance as in ’91. Bond returns were also much higher than normal this year.
* Emphasize equities. Three out of every four mutual fund dollars are sitting in bond and money market funds, but only stock investments have been able to outpace inflation by a significant margin long term. “Some people tend to be too conservative,” says John Teah, manager of Fidelity Investments’ downtown Los Angeles office. “Just about everyone should keep a portion of their assets in stock funds.”
Equities are highly erratic in the short run but much more predictable over periods of five to 10 years or more. Even if ’92 is an off year, investors looking 10 to 20 years ahead could suffer paper losses along the way and still emerge in good shape.
* Buy bond funds for total return, not yield. Rising interest rates erode bond prices, as the two move inversely. So a bond fund could wind up with a net loss regardless of how much interest income it spins off--as happened to junk bond portfolios in ’89 and ’90 despite double-digit yields throughout that period. People moving money into bond funds from bank accounts should realize that they’re climbing another notch on the risk ladder.
* Don’t chase hot funds. Managers who guided their funds to the top during a certain month, quarter or year probably took big risks to get there. That’s why it’s generally better to look for consistent long-term results rather than flashes in the pan.
“It’s futile to look at a list of high-flying mutual funds and then get mad about not owning those,” says Kurt Brouwer, a San Francisco money manager and author of a book on mutual funds. “If you do, you might as well look at a list of bottom-performing funs and be glad you don’t own them.”
* Don’t follow your investments too closely. Research your funds before you buy, then give them time to perform, Brouwer says. With too much vigilance, you could wind up trading more often than needed and might even hurt your returns. If you check your funds’ progress once a quarter, that should be plenty, Teah says. Brouwer figures that once or twice a year is enough.
* Don’t fall in love with a fund. If your investment has undergone a significant change since you bought in, it might be time to sell. Examples include a new portfolio manager, additional type of fee or big increase in assets that make the fund less maneuverable. “Ask yourself if the fund is still doing today what it was able to do yesterday,” says Gerald Perritt, a Chicago money manager and editor of “The Mutual Fund Encyclopedia,” a guidebook.
Paul Merriman, head of Merriman Funds Group in Seattle, suggests that you try to weed emotions from your investment moves. “Explain your decisions with numbers, not feelings,” he says. “Don’t rationalize to justify what you’re doing.”
* Understand the risks. There are several ways to measure risk with mutual funds, but an easy way is simply to examine a fund’s two worst years, Merriman says. “Make sure you could stand to lose that much in a down market.”
If you’re a buy-and-hold investor, Merriman suggests putting three-quarters of your assets in defensive stock funds along with bond and money market portfolios. Historically, the Standard & Poor’s 500 index has lost 10% or more of its value about one year in eight on average, yet the last time that happened was in 1974. In other words, a major bear market is overdue, Merriman says. “Balance your portfolio to guard against the potentially devastating financial and emotional damage,” he suggests.
* Take advantage of retirement plans. Individual retirement accounts, 401(k), Keogh and similar programs allow you to deduct all or part of your investment. Plus, they let you defer taxes on capital gains and interest income until you withdraw money. “Fund your IRA to the limit or make use of other retirement plans if they’re available,” Perritt says. And consider stocking them with mutual funds, which make sense for any long-term account because of their diversified nature, he says.
* Keep good records. Be sure to save at least one statement showing the prices and dates at which you bought, sold and reinvested shares during the course of the year. Your accountant will thank you at tax time, and he might even charge you less if he doesn’t have to reconstruct your financial records. The fund company itself can supply copies of missing statements, but this might prove costly and time consuming.
