React to those losses honestly, and get on with getting rich - DOLLARS & SENSE

Your Funds

January 14, 2001|By CHARLES JAFFE

The fallout from 2000 is about to begin.

Any day now, fund investors will get annual statements and reports and, for the first time since 1994, many of their funds are likely to show losses.

The declines won't come as a surprise, since they have been building for months. But seeing it on paper, in dollar terms (rather than percentage losses), and for a 12-month period, (rather than the occasional quarter), will make many investors start itching for a change. They may have been tied to the tracks of a losing fund for a while now, but it's a different story when they see the train roaring into the station.

"The minute people internalize a loss - and that may not happen until they look at their annual statement - they feel they have erred in judgment or become disappointed," says Michael Stolper, of the San Diego investment firm Stolper & Co. "There's a laundry list of anxieties produced by negative returns. There's a sense of threat, where someone feels flush and affluent one minute and ready for the poorhouse the next. They wonder how bad it will get, when it will recover, and, most importantly, what to do next."

In years when a fund lags behind the market or asset class - where it gains 10 percent while the benchmark goes up 15 - inertia is easy. Staying the course doesn't appear to be a damaging strategy. But in years when investors beat the market but still lose money (the Standard & Poor's 500 was off about 12 percent in 2000), or have losses dramatically bigger than the market, the downfall makes them feel that changes are necessary.

Whether moves really are needed depends less on market conditions than on the answer to several simple questions.

If your fund's 2000 performance has you ready to give it the ax, don't make a move until you answer the following questions:

Is this still the fund I bought? No one sets out to buy a fund hoping it will be a dog. Certain characteristics draw you in, such as asset class, the size of the fund, consistency of performance, ratings and rankings, the manager, the investment style or more.

If the elements that attracted you to the fund are still in place, the problem is likely to be with the market or with your tolerance for risk. Those may be reasons to make a change.

Did the fund lose more than it should? Investors need to factor the potential for losses into their expectations for a fund. But if you bought a plain-vanilla growth fund and you lost a lot more than the broad stock market did last year, something is amiss.

Chances are, the fund is overweighted toward technology stocks (although in a different down year, it could be something else altogether). Investigate why you had this performance surprise; it may lead you to the conclusion that you didn't quite understand the fund you bought.

How did the fund do compared with its peers? Never look at fund information, positive or negative, in a vacuum. No matter a fund's returns, you don't want it to lag badly.

Now that I have lived through the downside volatility, can I stand it? When funds are going up, they are never too volatile; no one ever complains that the fund that gained 50 percent in a good year should have grown more slowly.

The trouble shows up in the math after a bad year. If you gain 100 percent in Year 1, and lose 50 percent in Year 2, you're back to break-even; few people invest in funds hoping to get their money back.

If losses from 2000 have you losing your hair simply because of their magnitude - because moderate losses are something that every investor should expect to suffer occasionally - it may be time to make a change, regardless of what you foresee for the fund (a huge rebound, maybe?) in the future.

Have I been fooling myself? When your losses are big, take a long look in the mirror. Maybe the funds haven't been so great all along (they have been up, but lagging behind their benchmarks), or maybe the devil-may-care, let-it-ride attitude that felt so good in 1998 and 1999 doesn't reflect your feelings now that you've been stung by a loss.

No one likes to admit mistakes, but none of us are geniuses when our funds rise, nor are we dummies when they fall.

Losses happen. Deal with them, and your reaction to them, honestly and you'll be well positioned for whatever the market and economy dish out next.

Chuck Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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