Funds for the Long Haul

In this semiannualmutual fund roundupwe identify 90 top-performingfunds ranked by three-year returns

own six funds, but each of them includes Citigroup, ExxonMobil, and IBM among its top holdings.

“Time and diversification are an investor’s most important tools,” says Spradley. One of his clients, Laura Wilkinson, 41, a partner with the London-based law firm Clifford Chance Rogers & Wells L.L.P., believes that to be the case. “Altogether, I have more than 10 funds,” she says. “That includes some inside and some outside of my firm’s 401(k). Fortunately, I receive a comprehensive statement each month, which helps me keep track.” Not only is Wilkinson’s portfolio diversified, it’s made up of about 80% equities, where long-term results are likely to be substantial.

Doing her own research with Spradley, Wilkinson has assembled a portfolio designed for balance as well as growth. “If you want a truly diversified portfolio,” Spradley says, “look at the nine asset classes in the style box. You should consider having money in most, if not all, of them. And that’s what Laura has done.” Large-cap funds may invest in growth stocks, value stocks, or a blend of the two styles. The same is true for mid-cap and small-cap funds, so there are nine main categories among U.S. stock funds.

Do you need 10 or more funds, as Wilkinson has? Not necessarily. But an assortment can serve a purpose. “If you have two funds in each box,” says Spradley, “you can get different managers’ strategies for that sector. Add some bond funds and some international funds and you are starting to build a well-diversified portfolio.”

Merely scattering funds among style boxes won’t provide a potent portfolio. “You don’t want to be overweighted in one style such as large caps,” says Spradley. “You should first have an asset allocation [model] and then buy funds in proportion to your plan.”

To get the right mix, first decide how much you should have in stock funds vs. bond funds. “That depends on your temperament,” says Broussard, “and sometimes it takes a bear market to discover what your temperament really is.”

The current bear market has revealed just how much risk tolerance investors really have. “Some people look at the past couple of years and say, ‘I had tremendous returns for the five prior years, so I’m just giving back some of the excess,’” says Broussard. “They know that they’re still way ahead. Those people have the right temperament for a portfolio that focuses on stocks, where investors will probably earn high returns.”

On the other hand, some people feel the pain of seeing their stocks tumble. “Those losses are real to them, even if they’re giving up gains from the past,” says Broussard. “Those people have a lower risk tolerance so they should have more of their money in bond funds or some other type of fixed-income investment.” Taxable bond funds returned 6.11% per year for the past 10 years for the period ending June 30, lagging stock funds, and you can expect similar future results for this less-risky asset class.

Frank S. Arvai, a CPA and certified financial planner with Mutual Fund

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