Skip to comments.Many Mutual Funds Are Up 50% in '09 — But Beware
Posted on 12/07/2009 7:03:44 AM PST by SeekAndFind
It's been a great year for many mutual fund investors. Standard & Poor's Equity Research reports that 165 equity mutual funds are up at least 47% through Oct. 31, or at least double the return of the S&P 500.
While investors in those funds should feel euphoric, S&P is quick to issue a warning to investors who might fall victim to those seductive returns. The S&P report, issued Friday, indicates that many of the best-performing funds relied on short-term strategies and paid little attention to the underlying fundamentals of the stocks in their portfolios, which could lead to a performance problem in 2010. "Using only a backward-looking approach to selecting funds [i.e., past performance] has significant flaws because it ignores the fundamentals of the stocks owned by the fund along with relevant risk and cost factors of the fund," the report said.
Of the 165 domestic equity funds that at least doubled the market's return, only 12% are ranked as S&P five-star funds. In fact, 19% are now ranked with a one- or two-star rating, effectively placing them in the bottom half of funds on overall attractiveness. "These funds have relatively weak fundamentals that contribute negatively to the ranking," S&P's analysts note in their report. The reasons cited for such low star rankings: many own overvalued or risky stocks, have managers with short tenures, have high costs or offer poor long-term performance.
The S&P research team cited Hotchkis & Wiley Mid-Cap Value Fund, Legg Mason Capital Management Opportunities Trust and Fidelity Select Automotive Portfolio as examples of funds that had eye-popping 2009 returns, but are currently ranked as two-star funds by the S&P.
(Excerpt) Read more at time.com ...
Convert to cash and keep it within the fund..... I did that just as the downturn started last time, whew just in time, but unfortunately I didn’t put any back in to benefit from the recent climb.
Just more bubbles. Moving pieces of paper back and forth to pump up the volume. Gotta do that sort of thing when the economy doesn’t actually produce anything anymore.
After being down 40 percent, it’s halfway back.
If I had $10 invested and it went down to $5 in 2008 and then recovered to $8 in 2009, I'd still be down 20% even though the 2009 growth rate has been 60%.
But if I had invested another $5 in 2008 or early 2009, my return for that $5 is the full 60%. And my total portfolio would be $16 on my $15 investment -- which means I'm far better off than someone who never invested the additional $5 at all.
Since I am close to retirement, I moved all my MFs into money market today. The next step is bond funds paying 5-6 percent.
"Bond funds paying 5-6 percent" might actually be the biggest risk of all. With interest rates at historic lows, the VALUE of shares in bond funds is likely to take a huge hit when interest rates go up in the future. Think of it like this: If you are a bond fund and you have $1 billion worth of bonds paying 5% to 6%, then the value of those bonds is going to decline considerably if rates go up to 8% to 9%.
The best time to invest in bonds is when rates are HIGH, not LOW.
At the same time, you should keep in mind that when you retire, one of the biggest risks you'll face is outliving your assets, which means you should keep some money in growth assets even though you think it's time to be "safe." If you retire at 65, there's a good chance you're going to live 20-30 more years. That's a very long time horizon for an investor.
P.S. I don’t think you made a bad decision by moving into money markets today (it locks in the gains you’ve made). I just think you might want to consider re-investing this cash in a number of different areas over a period of time (not all at once).