The first six months of 2006 offered little encouragement for mutual fund investors. Stock funds rose in the first quarter then sank in the second, winding up with average returns around 3% for the period. On the bond side, investors barely broke even as their income distributions were offset by falling share prices in the face of rising interest rates.
To guard against such times of sluggishness and possible market corrections, Kaye and Nick Flores of Altadena, California, spread their assets around. “Counting our retirement plans, the money held in taxable accounts, and the money in our children’s accounts, we hold 14 different funds,” says Kaye, 44, a marketing executive at a healthcare firm.
The Floreses have been investing in mutual funds since the 1980s. “We invest in our funds three times each month,” says Kaye. “That includes the money I invest at work, in the 403(b) plan.” This plan, similar to a 401(k), allows her to defer some income (and some income tax) by putting money into a mix of funds. “We don’t really miss the money we’re investing,” she says, because the outlays become just like any other item in the family budget.
The couple picks their funds with the help of Arnetta Tolley, an investment adviser at the Pasadena, California, office of Edward Jones Investments, a financial services firm based in St. Louis. “We meet with her once each quarter,” says Nick, 46, a semi-retired network engineer who is launching a new business, N.S. One Spa and Salon, in Altadena. “We may bring in funds for her opinion, or she might recommend some funds for us.”
The Floreses currently have some 85% of their mutual fund assets in stock funds while 15% is in fixed-income and cash. Among the stock funds, 49% is in growth, 36% is in growth-and-income, and 20% is in global and international funds.
They own a number of American Funds products including EuroPacific Growth Fund, which focuses on the largest international companies, and are increasing their ownership in New Perspective Fund, which invests in both U.S. and foreign stocks. The emphasis at New Perspective is on multinational companies that stand to gain from changes in international trade patterns, according to Tolley. The couple also owns Capital World Growth and Income Fund, which is a “conservative cousin” of New Perspective. Other holdings include The Investment Company of America, Fundamental Investors, and The Growth Fund of America, all of which emphasize domestic stocks.
Though the results for the first half of 2006 may have been unexciting, they could have been much worse. As of early August, there had not been a market correction — a decline in market price of at least 10%, but no more than 20% — in more than two years. But today’s triple threats of higher interest rates, inflation, and energy costs make such a correction a strong possibility in 2007. In times like these, where can you turn to get sustained mutual fund performance?
While it’s hard to predict which types of funds will do well, John Coumarianos,