Loaded for Bear
For the pessimists or the cautious - different strategies for a market slump
BOSTON — Had enough?
With the stock market off 6.6 percent in less than a month, more than half of that in just two days, maybe it's time to batten the hatches, raise the drawbridge, bolt the doors - go conservative.
They say that all good things come to an end, and this market has been good for six years; generally pleasant for 15.
Most mutual fund investors likely won't rush to the exits (see story, right), but they might start looking for ways to build some defense into their fund lineup.
The radical solution: Dump the equities, shift to cash - from stock to money market funds, which offer small returns but keep your money intact.
Short of this "all or nothing" approach, many experts recommend a strategy that keeps you partially in the stock market, partially out.
This "asset allocation" covers stock, bond, and money market funds. Or you could buy one fund that invests in all three. If the stock market worsens, you shift to bonds and cash.
Financial planners suggest adjusting the mix annually. So this might be a good time.
Bonds risky, too
Keep in mind, though, that jumping into bond funds could be as risky as staying with the stock funds. If interest rates keep going up, bond prices will fall.
Take a look at the list to the right. It ranks mutual fund types by risk. The top three are stock funds, led by aggressive funds that generally turn hot in an up market but get burned when the Dow goes up in smoke.
The next four have an income element: dividend-paying stocks or a mix of stocks and bonds. Less risk, less return.
Next come fixed income or bond funds: steady but low return with low risk ... unless, as we said, interest rates start rising.
In that case, head straight for the bottom of the list and money market mutual funds: minimal risk and puny return, especially when inflation is factored in.
Look at it this way. As the stock market goes up like a rocket, moving up the list makes more sense. As it comes down like a dud, it may be wise to move down.
Some funds let you get even more defensive.
Up the down escalator
The Rydex Ursa, for one, growls the loudest in a bear market.
Lest there be any doubt about the fund's focus, the name, Ursa, means "bear" in Latin.
Based in Bethesda, Md., it's designed to head in the opposite direction to the stock market. So when Wall Street loses its appetite, as it did last last Monday and Thursday, Ursa owners take their spouses out for an expensive dinner.
For example, when the Standard & Poor's 500 index, the broadest measure of blue chip stock performance, lost 2.16 percent of its value Monday, March 31, Rydex Ursa popped 2.3 percent higher.
And when March 27 handed the S&P a 2.16 percent loss, Ursa rose 2.8 percent.
For all of March, the S&P 500 fell 4.26 percent. Ursa rose 5.25 percent.
Of course, when the S&P 500 rises, Ursa slips.
"We don't care what the market does," says fund manager Skip Varagh. "It's up to the people who use us to decide what they want to do." What most do is use Ursa to bet against the market or as a hedge.
As you might guess, Rydex Ursa is not for the faint of heart. It takes skilled market timing, and a $25,000 minimum investment (no sales charge; $1,000 minimum if you hold it in an individual retirement account). Most of its investors are professional investment advisers or traders.
We can sum up this cautionary note with one word: derivatives. That's what Ursa uses - short sales, futures, and options. So if that word gives you the jitters, you might think twice about this fund.
But the latest twists and turns on Wall Street have made Ursa a major target for investor dollars. From March 21 to March 31, fund assets grew by 33 percent to $582 million.
The fund actually appears to carry less risk than you'd expect. Between 1994 and 1997, the S&P gained about 60 percent. Ursa, moving inversely, should have lost that much but moved down only 23 percent.
A less radical stance comes from the Robertson Stephens & Co. Contrarian Fund in San Francisco.
The fund's philosophy is that much of the stock market is overvalued. So manager Paul Stephens takes a two-pronged approach.
He focuses on companies and sectors, such as natural resources, that have been overlooked by the market, and he buys short positions.
A "short position" in the stock market is calculated to make money from stocks that go down, and 25 percent of the Contrarian portfolio is in shorts. A fund spokesman says the company employs three research analysts looking for such losers.
Much of the rest of the portfolio pockets gold-mining and energy stocks.
Fund manager Stephens, the spokesman says, believes that as the world develops, increasing energy demand will drive such stocks higher.
The numbers agree. Although positioned for a down market, Contrarian keeps pace with the bulls (see chart, above).
Morningstar, the Chicago company that ranks mutual funds, gives the Contrarian its highest rating, five stars.