Archive for Monday, April 23, 2001

Investors should shop for bargains

Financial experts: ‘Buy low, sell high’ adage worthwhile in down market

April 23, 2001


Investors who once fearlessly marched onto Wall Street and dumped money into stock mutual funds are learning that the new investing landscape can be a horribly confusing and scary place.

Instead of reaping double-digit returns on their funds, folks are left scratching their heads when they see even their solid performers coming in with losses of 20 percent or more.

"I'm going backward," says Marc Porterfield, a 27-year-old Tustin, Calif., resident who has watched his money in several stock mutual funds decline a total of 20 percent in the past few months.

"I can ride the ups and downs, but is that the smart thing to do?"

He's not the only one feeling disoriented after the wild rides on Wall Street the past few weeks.

Many investors are trying to decide if they should ditch declining stock funds, stick with them or switch to less-risky investments such as bond funds.

In February, investors overall pulled the equivalent of $3.1 billion out of stock funds, and that outflow quickened to an estimated $20.6 billion in early March.

Experts offer advice

Don't give up on stock mutual funds so quickly, many financial experts advise.

"Whether you're a short-term or long-term investor, I wouldn't give equity funds a rest. We are pretty close to a bottom and then at some point, we'll have a recovery," says Victoria Collins, an investment adviser.

It's tough to be patient, though, when just about every fund category is down this quarter.

By now, heavy declines in technology and science shouldn't be a big surprise to investors. The average tech fund is down about 28 percent this quarter, according to the Lipper data service.

Growth funds also took a whack, with the average fund off about 20.5 percent. But even balanced funds are showing up in the loss column at an average 5 percent.

"Still, if you had the right balance of investments originally, this market hasn't done anything that warrants a change," says Paul Merriman of in Seattle.

If you're a young investor and have a long time to go before retirement, like Porterfield, you should celebrate this declining market because it gives you a chance to buy stock funds cheaply, Merriman says.

If you're older, you should take the time to review what you have in your portfolio and why. Many investors still need to broaden their investments.

More importantly, experts want to remind all investors of the "buy low, sell high" adage because a lot of stocks are bargains right now. When the market does recover, investors who bought during the sale will be able to sit back and reap the benefits of that early move.

But if you pull your money out, you not only have a loss, but you also might miss out on the upswing and wind up buying on the high side.

"(Then) you're zigging instead of zagging," says Charles Rother of American Strategic Capital.

By the time most people decide to pull their money out of the market because of what they feel is a "recession," they're almost always too late and the economy is starting to come back, Rother says.

Historically, in the first half of a recession, the average loss for stocks is 11.5 percent, he says. But in the second half of a recession, the average return for stocks is 9.7 percent.

Even if your favorite tech fund is down right now, it probably will rebound at some point, many experts say.

"It's just a question of how long it will take," Collins says.

Technology-specific funds whether they're computer funds, semiconductor funds, Internet funds or communications funds have been hit the hardest in this market slide. Next in line were the growth funds that were highly leveraged to the technology sector, Collins says.

Internet-specific funds will be extremely hard-pressed to come back because of the collapse of the investment bubble in Internet stocks, Collins says.

But tech funds that were more broadly diversified have a better chance of bouncing back more quickly, she says.

While it's tempting to pull money from one fund and put it into another that is doing better at the moment, don't get caught simply chasing performance, advisers say. Keep in mind that different asset classes and different styles of investing do better at different times in the business cycle.

Growth funds, for example, did better during 1994-1999, but value funds performed better in 2000 and probably will do well this year, Collins says. Does that mean you should move entirely to value funds?

"No," Collins says. "You'll want growth and value stocks because no one knows which will outperform this year or next."

Rother suggests keeping growth funds to a minimum in your portfolio.

But if you do hold growth, make sure you hold equal amounts of value funds, he says.

Quiz yourself

What if your usually solid stock fund is showing a loss? Before peeling out of the fund, ask yourself some basic questions, says Don Wilkinson of United Planners' Financial Services of America.

First, think about why you bought the fund in the first place. When you bought the fund, was it a good fund that met your financial objectives at the time?

"Unless the fund has changed its way of investing or if there has been a manager change, you should continue to hold the fund," Wilkinson says.

Also, measure how your fund has done during market drops against the same types of funds, Wilkinson says. If your fund performed better than the asset class average or did not fall as much, you should keep it.

But if there was a dramatic difference compared with its peer group, consider moving your money to another similar fund or other sectors with less risk, such as real estate, health care, financials or utilities, he says.

Gone are the days when an investor could pick just about any stock fund and watch it rise, but the basics still stand.

"Get to know your fund," says Sandra Field of Asset Planning Inc. That means going beyond looking at just the fund's past performance and doing some research.

Look at the holdings in the fund. How many stocks does it have?

If the fund holds only 25 to 40 stocks, it's a "focused" fund and is more susceptible to market gyrations, Field explains.

A more stable fund might have 150 to 200 stocks, she says.

Field is a big fan of bond funds when interest rates are decreasing or staying stable. When interest rates come down, the value of the funds generally rise, she explains. So when interest rates go back up in the future, it will be time to shift out of bond funds.

Bonds add stability to your portfolio, she says. Field has been adding bond funds to her clients' portfolios for the past few months.

Why do anything?

If you sit and do nothing, you might be setting yourself up for even more losses down the road. For example, your portfolio still might be heavily weighted in growth funds. But this year, you'd be wise to do the opposite and build with value funds, Wilkinson says.

Merriman agrees and continues to favor value funds.

If you freeze up and stop contributing money to funds or even buying, you could possibly lose out on some good opportunities.

"Confusing past stock price movements with future investment prospects, discontented investors often overlook tremendous buying opportunities created by a drop in stock prices," Rother says.

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