These funds offer shelter as markets get stormy


Your Money


Suddenly, investors have turned from giddy to gloomy, as the Dow has dropped more than 500 points since May 10.

If you were caught in the downturn of 2000 and vowed to never let the market erode your savings again, you might be hunting for a place to take shelter now. If you do, of course, you may miss the next move up in stocks, or protect yourself from the next move down.

No analyst can tell you with certainty what will come next. But many say the market simply seems to be getting knocked down a peg as investors try to make sense of reports pointing to higher inflation, rising interest rates and economic slowing.

If you don't have the patience to wait, and just want comfort now, you can find it in a balanced fund.

Within a 401(k) plan, it might be called a "hybrid fund," "asset allocation fund" or "life-cycle fund."

Balanced funds invest in stocks, bonds and sometimes cash. The combination gives the investor a chance to keep making money if the stock market goes up, but the bonds also insulate him from the market's blows.

Typically, balanced funds invest about 60 percent of investor money in stocks and 40 percent in bonds, but fund managers tweak the portfolios - maybe by a couple of percentage points - based on their view of the market and the opportunities they spot in stocks and bonds.

The combination doesn't protect you completely, but the damage is less brutal than with just stocks, allowing you a faster recovery.

Despite market losses in the early 2000s, investors recovered nicely if they kept money in a balanced fund.

According to Lipper Inc., a person who put $10,000 into the average balanced fund just before the market peaked in March 2000 would have had about $12,320 six years later.

But a person who put the same $10,000 into the Standard & Poor's 500 stock market index would have had about $8,530.

People tend to think of balanced funds when nervous, rather than as a long-term holding. During this year's first three months, investors put only $1.3 billion into balanced funds, compared with $13.2 billion during the comparable period a year ago, according to the Investment Company Institute.

Because investors move in and out of funds based on existing market conditions, they erode their returns badly.

Over the last 20 years, stocks have provided an average annual return of 11.9 percent. Yet, the average mutual fund investor has only earned 3.9 percent in stock funds and 3.3 percent in balanced funds after covering fees and expenses, according to research by Dalbar, a Boston mutual fund consulting firm.

Lou Harvey, president of Dalbar, said the awful returns are a result of bad timing.

Investors leave funds when they are nervous, missing out on the upturn. And they pour money into funds when the funds seem strong, but are ready to plunge.

Consequently, Harvey said, investors should put money into a balanced fund and stay the course.

Some funds mentioned for strong, reliable performance are: Bruce Fund, with a return of 9.7 percent so far this year, and an average annual return of 38.7 percent for the last three years; Fidelity Balanced Fund, up 3.5 percent for this year, and 14.2 percent on average for the last three, and Mairs & Power Balanced, up 5.3 percent this year, and 11.6 on average for the last three.

Messages for Gail MarksJarvis also can be left at 312-222-4264.

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