Mutual funds: A ride reserved for the strong at heart
The first quarter of '08 witnessed many investors shifting from stock- to money-market funds. They may miss out on a recovery.
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"The primary trend may be down for a while longer," he says, but the stock market has historically turned up well before recessions end. On average, recessions since World War II have lasted about 11 months. But the market has generally bottomed out about six months into a recession. By Leuthold's count, a recession began in late 2007 and should be largely over by this fall. In anticipation of a market rebound later this spring, the company raised its equity stake in its major asset-allocation funds in late January to 50 percent, up from 30 percent. Leuthold's portfolios are focused on industries such as agricultural products, energy, natural resources, industrial metals, and healthcare. "We like large-cap companies that have pricing flexibility in an inflationary environment and aren't sensitive to consumer spending," Mr. Bjorgen says.Skip to next paragraph
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For clues as to the market's direction, keep a sharp eye on financial stocks, one of the market's most beaten-down sectors, says Mr. Swanson. With the Fed likely to make another significant cut in the federal funds rate in the next month or two, "banks will have a widening of their net interest margins ... creating a greater willingness to lend," he says.
Still, investors should be wary of bargain hunting until market volatility subsides, says Fred Dickson, chief strategist at D.A. Davidson in Lake Oswego, Ore. "You'll continue to see significant mortgage and other types of consumer loan write-offs by banks" over the next two quarters, Mr. Dickson says. Another market damper: Corporate earnings are likely to be weaker than expected, he adds.
Unless you are many years away from retirement, stick with a diversified portfolio that has a conservative tilt and includes large-cap growth, value, and international asset classes, says Vern Hayden, president of Hayden Financial Group in Westport, Conn. A 50 percent commitment to stock funds, with one-third of that invested globally, should work out well over the next few years, he says. Mr. Hayden favors value-oriented managers who turn over their portfolios slowly and hold dividend-paying, large-cap stocks with a multinational flavor.
Investors relying on interest from CDs and money-market funds should be prepared for a drop in income. Six-month CDs, which yielded more than 4 percent a year ago are now being renewed at 2.5 percent or less. Even if long-term interest rates hold steady, money-market yields are sure to fall further as the Fed continues to lower short-term rates.
Other alternatives, such as bond funds, have increased appeal. "You are now being better compensated for extending the maturity length of your bond holding," says Morningstar research analyst Michael Herbst. Tax-exempt bonds, for example, have slumped because of exaggerated fears about the solvency of municipal-bond insurers. High-quality tax-exempt funds, whose yields are typically 10 to 20 percent below that of comparable Treasuries, are now yielding between 3 and 3.5 percent. That gives them an edge over short and intermediate government funds for investors in 25 percent (or higher) tax brackets. "High quality short-term muni-bond funds from Fidelity, Vanguard, and T. Rowe Price are worth a serious look," Mr. Herbst says. Long-term bond funds, on the other hand, are more vulnerable to inflation risks.
For risk-averse investors, Herbst also recommends "Ginnie Mae" funds, which hold fixed-income securities representing part ownership in a pool of mortgage loans. These pools are supported by the full faith and credit of the US government. That gives them stronger backing than mortgages insured by government agencies such as Fannie Mae or Freddie Mac. Ginnie Mae funds currently sport yields of close to 5 percent, considerably more than US Treasury Bond funds.