How to reduce hazards in owning mutual funds

The Ticker

February 26, 1997|By Julius Westheimer

IN THIS HIGH, volatile stock market, do you worry about your mutual funds and the people who manage them? I'm referring to funds you invest in personally, and those in your 401(k)s and other retirement plans. Maybe you should worry. Here's why:

The average age of today's mutual fund manager is only 28. His or her average tenure in the investment field is 3 1/2 years.

Only one in seven fund managers today has seen a "bear," sharply down, market. The last 10 percent correction was in 1990. In the 1987 crash, 80 percent of today's fund managers were still in high school.

And how sophisticated are you about your own mutual funds? An Investors Daily poll of people over 55 years old showed that nearly half of them believed mutual funds were protected against loss by federal deposit insurance.

A survey by Investors Protection Trust found that two-thirds of investors mistakenly believed that no-load funds carried no charges at all.

Only two in five knew that when interest rates go up, stocks, stock funds and bonds tend to decline.

A recent poll of Vanguard fund holders on their knowledge of mutual funds revealed that only 16 percent registered a passing score. One-third if them believed that government securities and bond funds were guaranteed against losses. More than one-third were sure that a mutual fund's diversification eliminated the chance of losing money.

"This is scary stuff, particularly considering that today, 63 million Americans own mutual funds -- a 66 percent increase over the past four years," the Dick Davis Digest comments. "More money has gone into stock funds in the past five years than in the prior 66 years combined."

To avoid mutual fund hazards, here's my advice:

Proceed in an orderly fashion by studying fund prospectuses before you invest. Don't be misled by "one-year" performance records. Five- or 10-year records are much more valuable.

Ask lots questions of your salesperson, including how long present management has been in place. Be sure the fund fits your objectives. Consider "dollar-cost averaging" -- investing a set amount of money at stated intervals.

In "Beating the Street," Peter Lynch, the former Fidelity Magellan guru, says, "Don't spend a lot of time poring over past history charts. That's not to say you shouldn't pick a fund with a good long-term record. However, it's better to stick with a steady, consistent performer than to move in and out of funds, trying to catch the waves."

In addition, remember that the two main advantages of mutual funds are diversification and professional management. Drawbacks include loss of control -- you can't pick individual stocks -- and often-too-high management and administrative fees.

Other negatives: You miss out on tiny stocks too small for funds; you don't get annual reports of individual stocks; and you're not invited to annual stockholders' meetings.

Pub Date: 2/26/97

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