Course Correction

With fears of an economic about-face, how can you keep your fund portfolio on the right track?

a long race.”

Among Davis’ clients hoping to reach the winner’s circle is Lawrence Powell, 42, senior pastor of Agape Family Worship Center in Rahway, New Jersey. “We have three children, ages 11 to 15, so some of my investing is intended to help pay college bills,” he says. “At the same time, I’m investing for my own retirement, which is long-term. And I’d like to leave an inheritance, too. As it says in Proverbs 13:22, ‘A good man leaves an inheritance for his children’s children.’”

To accomplish these multiple goals, Powell invests in mutual funds through his employer’s 403(b) plan, where he has been maximizing contributions, and also invests in tax-advantaged 529 college savings plans for his children. “I’m mainly using stock funds for my retirement,” he says, “because the long-term returns are likely to be greatest there. But I’m somewhat conservative with the funds in the college account.”

Powell was an even more conservative investor up until a few years ago. “I explained that he has about 20 years until retirement,” says Davis, “and he can live for many years after that, so he really needs to invest with a long time horizon. Therefore, we have increased his stake in stock funds.” Historically, the long-term results from stock funds top those from bond funds.

Some of the American Funds on Powell’s list

are the same as those held by the Floreses: Growth Fund of America, Capital World Gr
owth and Income, Fundamental Investors, and New Perspective. But there are others as well. “Lawrence invests in New World and SMALLCAP World funds,” says Davis, “to get a good mix of non-U.S. stocks. Companies are doing well overseas, so investors can feel more comfortable with international funds.”

On the domestic side, Powell also has AMCAP Fund, which holds large-growth stocks. “In addition, he invests in American Balanced Fund,” says Davis, “which is more conservative because it holds bonds as well as stocks.”

What funds might appeal to investors who are worried about a correction next year? “Funds that tend to do better during market corrections are those that focus on providing income as part of their overall objective,” says Davis. “Such funds may be found in the growth-and-income, equity income, and balanced categories.”

Davis’ list of funds that have done well during previous market corrections include American Balanced, as well as The Income Fund of America and Capital Income Builder, two funds that hold dividend-paying stocks and bonds. (The latter fund has more global exposure.) Davis also cites American Mutual Fund and Washington Mutual Investors Fund, two stock funds that hold large companies likely to pay dividends. “As always,” he says, “part of a good investment program to offset market corrections would be a diversified portfolio that is not overweighted in any one industry.”

In Search Of Income
It’s no surprise that interest rates are rising and are expected to continue doing so in the coming year. Coumarianos says investors should keep some money in bond funds even though the rising rates should devalue bonds. “An intermediate-term bond fund can

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