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Transcript

Mutual Fund Performance

Ben White
Washington Post Staff Writer
Monday, April 4, 2005; 12:00 PM

Washington Post staff writer Ben White was online to answer reader questions about mutual fund performance in the first three months of 2005.

A transcript follows.


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Ben White: Greetings everyone. Sorry to be a couple minutes late.

Story I wrote on Sunday was more about the market as a whole than specific mutual funds but I'll see what I can do.

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washingtonpost.com: As Dow 11,000 Fades Further, Inflation Colors Assessments (April 3, 2005)

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Peterborough, N.H.: How do Index fund returns compare with other types of mutual funds?

Ben White: For the long term, index funds tend to be the safest and best performing bet.

However, if you have a shorter time horizon, other funds that focus on specific sectors or industries can be a good bet.

For instance,energy focused natural resource funds did great in an otherwise very difficult first quarter.

But it can be hard to pick these types of funds, and often the tendency is to pile in just as the easy money has been made. So treat carefully.

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Washington, D.C.: Given rising oil prices which appears to be a persistent trend as well as rising interest rates, aren't mutual funds and the stock market in general a bad bet for investment?

Ben White: That's a very tough question to answer. Certainly the rising rate environment and higher oil prices weighed heavily on stocks this quarter.

A lot will depend on the direction of inflation and corporate first quarter profits that will start to be announced in earnest this week.

If inflation stays around where it is now, not a great number but not terrifying either,and profits come in around expectations (about 8.2 percent gains overall) then stocks could have some room to move forward over the course of the year.

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Montgomery Village, Md.: Ben, is it too late to hop on the energy fund bandwagon?

Ben White: That's a popular question these days. I can't give you a definitive answer, of course, but I will say that money managers I talked to this past week said energy stocks may be a bit overvalued right now and ripe for a pullback.

BUT. They also said that energy prices, even if they take a break, are on a steady upward trajectory. So many view the next pull back in energy stock prices as a buying opportunity. So I think in the end it would be smart to at least consider putting a bit of money in an energy-centric fund.

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Ithaca, N.Y.: Why does the Post have this section with all its emphasis on the returns of a single calendar quarter? All the research out there on behavioral finance indicates that investors almost universally have a time horizon for judging performance that is way too short, and this causes people to make bad decisions (myopic loss aversion). A great quarter does not mean a fund is a good one, and there are plenty of great funds that have bad quarters every once in a while. In fact the latter is often a distinguishing feature of funds that outperform over long periods of time. Doesn't the Post, by trumpeting the winners and losers over the quarter, encourage this bad behavior on the part of investors?

Ben White: Fair points, Ithaca. I would probably defer to my editors on the reasons for the existence of this section.

But I agree that you cannot judge a fund on one quarter's performance or make any investment decisions solely on those three months.

That said, taking stock each quarter of how your funds are doing and how the whole broad universe of funds is doing is critical (and also for many enjoyable). I think the key is just not to get sucked into the whole short-term horse race coverage of who is up and who is down over such a small window.

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Boulder, Colo.: How do you think this quarter's performance compares to the last time the market approached 11,000. Do you think the market will drop back down to 9,000 again?

Since oil is a finite supply, prices for oil eventually have to rise.

Ben White: Boulder is correct on oil prices, of course. We aren't finding much new in the way of supply. And demand is growing like gangbusters with the explosion of economies in China, Brazil et al. That's why some folks are starting to think about investing in alternative energy producers. Of course any gains there are many years away, but one has to think they will come eventually.

As for the Dow, the last time we were above 11,000 was at the tail end of the late '90s/early '00s boom. And I think the steady recovery from that implosion, and the 9/11 attacks, has been based more on solid underlying fundamentals.

So no, I don't see any reason for the Dow to head as far south as 9,000 again. But of course major geopolitical events or a huge spike in inflation could change that.

I'd say we may bounce around underneath 11,000 for at least a little while. There is just too much uncertainty about oil, rates, inflation and profits to really drive us up very fast right now.

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Auburn, Maine: A financial advisor is suggesting that I sell my small cap holdings since they have had their run and show signs of slowing...and put that money in cash to wait and see. Isn't that a form of market timing? Might another correct view be to sell some or underweight, and to leave some of the position there?

Ben White: Well, its certainly not market timing in the sense of the improper practice that regulators recently cracked down on.

And your FA has a point about small caps having had a good long run (longer than many expected) and now giving way to large caps that tend to do better in a rising rate environment. As for idling in cash, I can't really advise you on the wisdom of such a move. Sorry, not what I do! I'd be in a different business otherwise.

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Bowie, Md.: To Auburnn, Me: how much does your FA get (in commissions and fees) when you make a transaction as opposed to leaving your money where it is?

That said, another way to look at the question is: "If I was entering the market today, how much would I put into that sector?" Then -- "is it worth the transaction cost to meet that target?"

Rebalancing your portfolio so that 20% instead of 23% is in one sector is often not worthwhile.

Ben White: Very good point, thanks Bowie.

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washingtonpost.com: You can check performance of individual funds online here.

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Washington, D.C.: What are your general thoughts about international funds? Specifically those that focus on the high tech industry in countries like South Korea and India? Do you know of any good performers that seem to be maintaining well?

Ben White: My general thought is that international funds are a good idea right now, based on the fast growth rates and potential in so-called BRIC countries, Brazil, Russia, India and China.

These are risky investments of course so should represent just one piece of a well-balanced portfolio. Some of these countries will certain stumble. But as you've seen, some global funds are doing quite well.

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washingtonpost.com: The Washington Post's mutual fund coverage is online here.

BEST PERFORMERS

WORST PERFORMERS

BIGGEST FUNDS

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Alexandria, Va.: I have an acquaintance who informed me he has stopped contributing to his retirement vehicles until the stock market begins to perform better. I argued that he is losing out on Cost Point Averaging benefits and that buying low will enable him to reap better rewards later on when the market performance improves. He says I'm nuts and am waiting money. Am I missing something here?

Ben White: Don't think you are missing anything, no. It's always a good idea to keep contributing to retirement savings, though you have to carefully consider your time horizon and what sort of investment vehicle makes the most sense.

But where something like a 401k is concerned, doesn't make sense not to keep contributing and the free money from your employer.

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Gaithersburg, Md.: What are the long-term economic implications of a fiscally irresponsible government that is spending money like drunken sailors and refuses to adopt a "pay as you go" policy?

Ben White: Well, the possible implications clearly include high interest rates and the concern that foreign governments will lose confidence in the U.S.'s ability to manage its debts and deficit.

That's why we are all carefully watching foreign purchases of U.S. bonds. Any signs that foreign governments, especially the big purchasers in Asia, are moving money out of dollar-denominated assets, sends chills through the market.

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Foreign Funds: Given the impending collapse of the dollar, isn't it a very good idea to rebalance with a bias to foreign funds? Personally, I did that once the election results showed the same foolish fiscal policies would continue, and I've enjoyed having a hugely gaining IRA, while everyone else is stagnant or losing. I'll rebalance back when we look to be going back to sanity.

Ben White: Well, I wouldn't go so far as to predict the impending collapse of the dollar. But its fall is clearly a concern and you were smart and timely to increase your foreign exposure. Congratulations!

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Gaithersburg, Md.: Our company 401(k) Plan is in Oppenheimer mutual funds. The only latitude we have is to pick the funds to invest in. Any advice for the uninitiated as to what type of funds to pick at a time like this?

Ben White: Well, this always depends on your risk tolerance, time horizon etc. You certainly would want to strongly consider a stock index fund for a good chunk of your 401k then some portion in a bond fund. 60 percent stocks, 40 percent bonds is generally a pretty conservative approach. And you might want to put more in stock if you are investing over the fairly long term.

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RE: Alexandria: Stopping contributions on a 401k is a poor decision for at least 2 important reasons: right now one can buy shares cheaper while the market remains lower...also he/she loses the pre-tax benefit...why is the market psyche for so many to buy into a rising market and sell in a falling market?...should be the other way around

Ben White: I'd have to agree w/ Alexandria. There really is no good reason to stop contributing as much as you can to your 401k. The tax benefits and the free money from your employer are just too compelling. The temptation can be there after a rough quarter. Resist it!

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Ben White: OK folks. We are about out of time. Sorry I couldn't answer some of the very good questions about specific funds. I'm just not expert enough to address those questions.

And as I said, I'm not in the business of offering investment advice.

But I enjoyed talking about the market and investing in general. Best of luck to all of you and thanks for participating!

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