Most Fund Investments Are Up Since ’87
Stock mutual fund owners who five years ago this week vowed to remain long-term investors--as the stock market crashed around them--have mostly been rewarded for that gutsy decision.
Even investors who bought stock funds near their peaks in 1987 have earned more by staying in the funds than they would have in money market funds, according to fund tracker Lipper Analytical Services.
The average general stock fund gained 45% in the five-year period Sept. 30, 1987, to Sept. 30, 1992. Because the stock market in September, 1987, was hovering just under its summer peak, the five-year figure provides a fair picture of the returns earned by investors in the worst-case scenario--those who bought near the top.
In contrast to the average stock-fund return, investors who left their savings in a money market mutual fund the past five years have earned 38%, or roughly 7 percentage points less than what stocks earned.
What’s more, while many individual stocks still haven’t returned to their 1987 peaks, the vast majority of stock funds have gained at least some ground since the ’87 highs, as the chart shows.
The funds’ ability to advance even while many stocks have not during the past five years is a tribute to the benefits of diversification, of course: Because most funds own a cross-section of stocks, they are fairly certain to track the broad movements in the market. The market overall has recovered since ‘87, and thus so have stock funds.
“People who sold at the time of the crash needed years to make their money back,” says Bernadette Murphy, director of market technical analysis at M. Kimelman & Co. in New York. “The crash experience shows that long-term investors should always try to ride out the storm.”
Indeed, many experts argue that, at a minimum, you should plan to remain invested long enough to allow your stock fund to go through at least one complete market cycle (bull to bear to bull), which typically takes four or five years.
The likelihood that the stock market will rise in any one year is only about 70%, but that figure rises to 89% for a five-year stretch, according to Ibbotson Associates of Chicago.
Still, analysts caution stock fund investors about becoming complacently buy-and-hold. Just because a specific fund has held up since 1987 doesn’t mean it can avoid a serious decline in the next bear market.
Though the ’87 crash and 1990 bear market were tough on many funds, they may in retrospect appear mild if a classic long-term bear market should arrive.
The bear market of 1973-’74, for example, was so brutal that some of the highest-flying funds of the late 1960s were liquidated by the time the market bottomed in 1974. The Dow industrials plunged 43% in that bear market, and many stock funds fared worse.
Charles Biderman, who writes the Market Trim Tabs investment newsletter in Santa Rosa, Calif., argues that one of the major weaknesses of the fund industry is that many or most of the people running stock funds entered the business in the 1980s--and thus have no experience with traditional bear markets.
Biderman points out that there are 3,500 mutual funds of all kinds today--stock, bond and money market--up from 2,317 in 1987.
“The vulnerability in the system is that you have thousands of young kids managing billions of dollars of unsophisticated money,” Biderman says. When a classic bear market comes, he maintains that many fund investors will suffer devastating losses at the hands of inexperienced fund managers.
Some fund proponents, however, say too much is made of the alleged experience gap. “Maybe it’s a problem that these investors are defined by the 1980s, but every generation is defined by its own experiences,” says Don Phillips, a principal at fund tracker Morningstar Inc. in Chicago.
He also contends that the issue of mutual fund managers’ tenure is overblown. Fully 61% of all fund managers are 40 or older, Phillips says, countering the notion that the business is mostly managed by hotshots in their 20s.
Nonetheless, it’s true that most fund managers today haven’t witnessed a classic bear market. How they’d fare in that situation is uncertain.
How can fund investors lessen the risk that it will be much tougher to make money over the next five years than in the last five?
One key is to increase your diversification among stock funds. Fund managers can follow different strategies, and what worked in one period may not work in another. By diversifying your fund investments to encompass a mix of strategies, you may boost your chances of earning a healthy return.
Growth-stock funds, for example, were the stars from 1987 to last year. Now, the market has shown a greater interest in so-called value stocks, which typically are more conservative, high dividend-paying businesses like energy companies and utilities.
If you own only growth funds, moving some money into value funds (while still keeping your growth funds) could be a smart diversification.
Likewise, though foreign stock funds have been a disaster since 1987, longer term they represent a good hedge against sub-par performance by U.S. stocks.
Bob Doll, director of domestic stock investing for Oppenheimer Management Corp. in New York, thinks that the next five years will favor small-company, international and growth funds--three areas that have been out of favor lately.
“The U.S. has a mature economy and will have one of the slowest growth rates in the world,” Doll says. “That means the U.S. market will under-perform, especially against those of faster-growing developing countries.”
At a minimum, a well-balanced fund portfolio should include holdings in the international, small-company and conservative-equity categories, along with some fixed-income investments, experts say.
How Funds Have Fared Since ’87 Unlike a fair number of stocks, the vast majority of stock mutual funds have bounced back from the crash of October, 1987. The reason is that the overall market has recovered, and well-diversified funds tend to move roughly in line with the market. Measuring from Sept. 30, 1987--near the top of the market that year--through this September, here are average returns for major stock fund categories, and the percentages of funds in various categories that have gained ground over the five-year period.
Avg. total return, Pct. of funds Fund category 9/87 to 9/92 rising since ’87 Utility stocks +74.31% 100.0% Balanced (stocks and bonds) +54.68% 100.0% Equity income +48.02% 97.4% Growth and income +47.86% 100.0% Small company growth +46.67% 95.3% Growth +44.60% 93.5% Capital appreciation +39.92% 87.4% Science & technology stocks +35.62% 93.8% Global (U.S. and foreign stocks) +16.45% 71.4% Natural resources stocks +15.32% 66.7% International (foreign stocks only) +9.32% 68.6% Gold-oriented stocks -39.25% 9.5% Average general stock fund +45.18% 95.0% S&P; 500 index, with dividends +53.89% NA Average money market fund +38.37% 100%
Source: Lipper Analytical Services Inc. NA -- not available
