1-day surge may mean too many eggs in 1 basket

Your Funds

January 21, 2001|By CHARLES JAFFE

There are some times when the fact that your mutual funds make a lot of money in a day should make you nervous, rather than give you reason to celebrate.

Jan. 3 was one such day.

It was the day when the Federal Reserve cut interest rates, causing a one-day market sensation. The Dow Jones industrial average gained about 3 percent; the Standard & Poor's 500 gained roughly 5 percent; and the Nasdaq composite jumped more than 14 percent, its biggest one-day gain.

Long-term investors (and faithful readers of this column) know not to make much out of a single day and often avoid reviewing their funds on a daily basis.

But Jan. 3 was no ordinary day. Whenever the market makes a big one-day move, a fund's performance sends messages about volatility, portfolio holdings, and more.

"On days when the market has super-volatility, it's like having a really bright light shined on your fund," says Roy Weitz, who runs the FundAlarm.com Web site. "The market is forcing your fund to disclose what it owns and to show how it performs in extreme conditions. You can learn from that."

Now is as good a time as any to look back on how your funds did that day. It's close enough so that it's still relevant, yet too late to tempt you into doing something foolish based on yesterday's returns. If you don't have Jan. 4 newspaper lying around, call your fund, visit its Web site or do some research at a site like www.dailystocks.com to see how you did on Jan. 3.

The bigger a fund's percentage gain that day, the greater the chance it's a concentrated fund that's heavy on technology. That's no big surprise if you own a sector fund such as Red Oak Technology (up roughly 24 percent on Jan. 3), but it might be news if you own Red Oak's sister Pin Oak Aggressive Stock, a mid-cap fund that gained about 20 percent on Jan. 3 due to a portfolio that is nine-tenths into technology issues.

Look for gains that are in character for the fund, its asset class, and its benchmarks.

Neuberger Berman Focus Trust, for example, surged 11 percent because it is nearly one-third in tech stocks. Similarly, plenty of ordinary, nondescript growth, growth-and-income and balanced funds had oversize gains relative to peers and their asset classes.

Because most funds disclose their portfolio no more than twice a year, performance on days of hyper-volatility gives you information you might not otherwise get.

"On days like that, you get a window on the composition of your fund," says G. Edward Noonan of Triad Investment Advisory in Hingham, Mass. "You can look through that window to see if the fund is acting in a way you expected when you bought it."

Of course, no one complains about getting big gains, nor should you dump a fund for having them. It's just that any fund capable of that kind of upswing is equally capable of taking it all back - and more - just as suddenly.

Mutual funds were never supposed to be vehicles in which investors made fast killings. A 20 percent annual return requires an average gain of less than one-tenth of a percent during every trading day of the year.

It's not necessarily bad to take a flyer on funds that are high-risk and tend to have tremendous volatility. But if every fund you own posted huge gains on Jan. 3, don't fool yourself into believing that you have a diversified portfolio.

What's more, keep in mind that wealthy investors typically didn't get that way shooting for fast gains. Funds that are steady gainers over time tend to do better in the end than funds that are always in feast-or-famine mode.

"If all of your funds are moving in the same direction at the same magnitude, you have a problem," says Marc O'Brien of O'Brien Management in Cambridge, Mass. "That tells you that maybe it's time to make a change, not based on what the market did on one day, but based on how you built your portfolio."

Remember, too, that a big part of successful investing revolves around your tolerance for risk. You might have cheered a big gain on Jan. 3, but you might be devastated when the next market nose dive gives you a loss that's equally big.

"The strength and suddenness of an upward move says something about how quickly a fund may go down," says Roger Gibson of Gibson Capital Management in Pittsburgh. "If we learned anything from last year, it's that we should pay attention to what can happen when the market turns ugly."

Weitz of FundAlarm.com says, "Really big days up or down don't come along too often. Investors should make the most of what they can learn whenever those days come along."

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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