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Brace Yourself: That 1st-Quarter Statement May Be an Eye-Opener

March 12, 2000|PAUL J. LIM

The first quarter is nearly over, so a sneak peek at how your mutual funds are doing this year may be in order.

After all, the Dow Jones industrial average is down 13.4% since the start of 2000. And the Standard & Poor's 500 index of blue-chip stocks also is in the red--it's down nearly 5% this year.


* Funds that focus on large value stocks are off nearly 8%, on average.

* Large blend funds, which are a decent proxy for those old-fashioned "growth and income" funds, are down 2%.

* So-called balanced funds, those that invest in both stocks and bonds, are down nearly 1%.

* Some diversified stock funds, including familiar names such as Oakmark, T. Rowe Price Dividend Growth and Brinson U.S. Equity, have suffered year-to-date losses that are approaching, and in some cases exceeding, their worst-ever three-month declines, according to fund-tracker Morningstar Inc.


Let's face it. Many of our traditional "core" equity funds--those we're likely to own in our 401(k) accounts or IRAs--are off to a terrible start.

Of course, the tech-heavy Nasdaq composite index is up more than 24% already this year, crossing the symbolic 5,000-point mark last week. But the funds many investors have chosen for their retirement accounts tend to be more conservative and less focused on highflying tech stocks.

And this year, being conservative has been a bad bet.

Individual investors have already begun to take notice. For the last three months, some have been pulling money from core growth-and-income funds, in some cases shifting that money into "momentum" plays such as technology-sector funds and aggressive growth funds, which invest in the technology and emerging-growth stocks that dominate Nasdaq.

This dynamic is sure to pick up steam, analysts say, once first-quarter statements are mailed out and investors realize that their old standbys such as Babson Value, Fidelity Equity-Income, T. Rowe Price Equity-Income and Vanguard Windsor are down anywhere from 11% to 17% since Jan. 1. And if that happens, it could spell even more trouble for investors in these money-losing "value" plays.

In part, that explains why Laura Tarbox, head of Tarbox Equity, an asset management firm in Newport Beach, has reduced her recommended allocation toward value stocks and value-oriented funds.

At the start of the year, Tarbox was recommending investors hold 30% to 35% of their portfolios in value-oriented stocks and funds. Today, that recommendation is down to 20%.

To be sure, a central idea of investing is to "buy low, sell high." And many core diversified stock funds are now lower than they've been in recent years. So, one could argue that now's the time to be increasing your allocation to value, not decreasing it.

Tarbox hasn't given up on this general principle. Nor has she given up on long-term diversification. Nonetheless, "we don't want to be the last ones out" of a tumbling sector, she says.

Indeed, fund investors--including those who invest mainly through their 401(k)s or other retirement accounts--have to factor in not just what their funds are doing, but how their fellow shareholders are behaving.


When funds are bleeding assets, it means fund managers can't play offense because they have no new stream of money to do that with. And they can't effectively play defense because cash--the great cushion in a down market--is flying out the door.

"People are fed up" with core value funds, Tarbox says. "It doesn't seem to me that it's going to turn around real soon."

So where does that leave investors in these funds?

You shouldn't automatically sell. Take time to carefully examine your funds, what they own and how they're faring relative to the average funds in their categories.

Then, ask yourself: How much would you be willing to lose before you'd begin to panic?

Given your sensibilities--and given how much time you have to make up for losses in your account before needing the money--would you be willing to lose 15%? 20%? What if your fund fell 40%?

If you believe a fund is a solid long-term holding, and you've got many years of investing ahead of you to wait for a rebound, even a 30% loss may not be reason enough to sell.

But if you know you're increasingly likely to sell if your losses should worsen, there are things you can do now to avoid doing the worst thing--selling everything at the bottom--later.

For instance, within your 401(k), you have two levers. There's the money you have already accumulated in your account. Then there's the stream of new money you contribute with every paycheck.

One option is to simply direct more of the new money into growth funds, cash, bonds or other alternatives to depressed value funds. If the gains in growth stocks continue, at least you'll know you're riding along.

Or you can do the reverse: Move some percentage of your accumulated assets from value funds to other alternatives, but increase the amount of new money you're contributing to beaten-down funds.

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