At Risk Shaken up by market volatility? That wake-up call can help you hone your investment strategy.
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Thank heaven for volatile markets. They teach newcomers, andremind not-so-new investors, that stock prices don't always goup. And believe it or not, that's a good thing.
If you looked at mutual-fund performance at the end of the firstquarter 2000, you might have thought the bulls planned on stayingin charge on Wall Street. But after weeks of market swings and bigtech hits, the story's different: On March 31, the averagestock fund was up more than 7 percent for the year, but by April27, that gain had shrunk to 2.8 percent, according to fund analystLipper Inc.
Losing money is never fun, but it's the reality of investingin mutual funds.
Dian Vujovich is a nationally syndicated mutual-fundcolumnist and author of 101 Mutual Fund FAQs (Chandler HousePress). For free educational mutual-fund information, visit her Website, www.diansfundfreebies.com.
The Game Of Risk
Understand what "risk" means: that your investmentmight not make you money; or, that you could lose your initialinvestment, or some of the money it had previously made foryou.
How much risk can you stomach? For those with little risktolerance, money-market mutual funds offer far better returns thansavings accounts or bank money-market deposit accounts. Move toequity funds, and the risk meter starts to rise. Balanced, flexibleand asset-allocation funds are considered among the least riskybecause they invest in both stocks and bonds. Single-country,specialty and sector funds, such as Internet-only funds, areconsidered the most risky, because they invest in specificindustries or regions of the world, and when the region or industryfalls out of favor, so falls fund performance.
"Bear Essentials: What to Do During Market Declines"is a brochure from The Forum for Investor Advice, a Bethesda,Maryland, nonprofit organization, that looks at market volatilityand how to plan portfolios accordingly. Here are somehighlights:
- Dow Jones Industrial Average (DJIA) declines of 15 percent ormore typically occur about once every two years.
- On average, during the 20th century, the DJIA declined 5percent or more three times each year.
- It can take months or years for the DJIA to recoup setbacks.The 1929 crash took 16 years. The 1987 crash took 23 months.
- Finally, and most important, diversified portfolios can cushionthe blow of a bear market. In the bear market of 1973 to 1974,stock-only portfolios lost an average of 48 percent of theirvalues. Portfolios of 60 percent stocks and 40 percent bonds lostan average of 29 percent.
The trick to becoming a satisfied, long-term mutual-fundinvestor is knowing how much risk you can comfortably take.Don't let market volatility scare you-use it as a way to gaugethe mutual funds to which you're best-suited.
Mutually Beneficial
How much can you expect your mutual fund to grow?
Below is a look at some long-term average annual returns onvarious types of funds. Keep in mind that these figures are basedon the past, and that past performance offers no indication of whatthe future will bring:
Type of fund | Averageannual total returns | Averageannual total returns |
Period | 1-year (6/3/99 to6/1/00) | 5-year (6/1/95 to6/1/00) |
Diversified stockfunds | 22.27% | 19.67% |
Health/biotechfunds | 49.62% | 21.60% |
Science & technologyfunds | 92.48% | 36.43% |
S&P 500funds | 12.12% | 23.58% |