QUARTERLY STOCK MUTUAL FUND REVIEW : If You Thought Last Quarter Was Bad, Hang On

For stock mutual fund investors, there were few places to hide in the first quarter. And there may be fewer in the second quarter, if Wall Street’s bear nightmare comes true.

The average stock mutual fund lost 3.35% in the first quarter, the biggest quarterly decline since the 15.7% loss in the bear market of third-quarter 1990.

Of 24 stock fund categories tracked by Lipper Analytical Services, only four showed gains for the quarter. The big winner: Japanese stock funds, up 17.3% on average. The big loser: Pacific region stock funds, which lost 11.5% on average as smaller Asian markets crumbled even as Japanese stocks surged.

For investors in most U.S. stock fund categories, the quarter’s loss was 3% to 5%. Coming after six straight quarterly gains, most fund shareholders probably wouldn’t think much of this year’s giveback.

The problem, of course, is that most of the funds’ losses occurred in just one week--last week. And with the stock market poised to plummet today after the latest dramatic surge in interest rates on Friday, what might ordinarily be a minor “correction” in stock fund prices now has the makings of something far worse.

So is this a good time to sell your funds--or is it a better time to begin thinking about bargain-hunting?

The answer, of course, will be different for every investor. But as a general rule, getting a little more conservative in your portfolio probably is the smartest move, many experts say.

“I think everybody should be reducing their risk at this point,” warns Charles LaLoggia, a bear who writes the Special Situation Report stock newsletter in Rochester, N.Y. At the very least, that means building a significant cash “safety” cushion to buffer against any broad stock decline.

This selloff could blow over, certainly. But the fact that this bull market has gone on longer than most--42 months--means that a sharp decline is overdue.

What’s more, rising interest rates mean that U.S. stocks (and foreign stocks) have competition they didn’t have when rates were at 30-year lows in ’93. That may force many stocks lower, temporarily, so their dividend yields are more competitive with bonds.

The great risk is that, just as last year’s optimism boosted many stocks to wild heights, this year’s pessimism could go too far on the downside. “Stocks go to undervalued from overvalued as sure as night follows day,” LaLoggia says.

If this is indeed the start of a bear market, you could be looking at a painful decline in your stock fund’s value, depending on the type of fund you own. Since 1978, Lipper Analytical has tracked six separate declines of 15% or more in the average growth stock fund.

If numbers like that scare you, and you feel an urge to take some profits out of your long-term stock funds, go ahead, experts say--though not necessarily all at once today, in what may be a wild panic. Wait for the stock market to bounce in the near-term.

Yet many advisers suggest that long-term stock fund investors do nothing at all now, assuming they truly are long-term in outlook (i.e., they don’t need their money for at least five years) and that they have a well-balanced portfolio with a hefty cash cushion.

Kurt Brouwer, whose San Francisco firm Brouwer & Janachowski manages $300 million for individuals, has 65% of the typical client’s assets in stock funds and 35% in short-term bond funds.

If he thought a bear market was brewing, Brouwer says, he would cut the stocks’ weighting to 40%. But he doesn’t see it. “Corporate earnings are coming in strong,” Brouwer says, which suggests that the stock market--or at least some stocks--have life left in them.

And where should brave bargain-hunters troll? Michael Lipper of Lipper Analytical notes that real estate-related stock funds were up 0.81% in the first quarter, and could continue to surprise if a strong economy lifts real estate prices. He also suggests that the lack of enthusiasm for European stock funds (down 0.15% for the quarter) may be an invitation, if you expect Europe’s economic recovery to arrive later this year.

Stock Funds Give Some Back. . .

The average stock mutual fund dropped 3.4% in the first quarter, the first quarterly decline in seven quarters and the worst since the bear market slump of 15.7% in the third quarter of 1990.

. . .as Investors Brace for the Worst

If you believe that a bear market is at hand, how much will the average stock fund drop? Here are the percentage losses in the last six major down cycles for the average growth stock fund. (Average growth fund decline/Market decline)

-21.2%/July-October, 1990

-30.8/August-December, 1987

-17.9/June, 1983-July, 1984

-25.6/November, 1980-August, 1982

-17.8/February-March, 1980

-15.0/September-November, 1978

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. . .as Investors Brace for the Worst, Los Angeles Times