Is This A Buyer’s Market?

After three near-phenomenal years, here are the funds shaping up as the best for 1998

of years, and of course, that only helps the index.”

Does that mean index funds are infallible? Not quite. One instance where they could end up trailing actively managed mutual funds would be if stocks slid over the coming year. The reason: index funds must invest every cent of their money and aren’t allowed to hold a cash position no matter what’s taking place in the market.

Index funds, though, aren’t included in our annual ranking for one reason: shopping for them boils down to finding the company that runs the most frugal, penny-pinching operation, one that won’t eat into your returns with a lot of unnecessary expenses. Hands-down, fund industry experts say the most efficient operator out there is Vanguard, the company that invented index funds. And, the same pros will tell you that the investment of choice is the Vanguard Equity 500 (800-662-7447), a fund designed to track the S&P 500 at the lowest cost possible.

LARGE CAP FUNDS
Forget that small company stocks historically outperform big corporations. The same concerns that helped large-cap stocks shine in ’97 are likely to give them a leg up in ’98 as well. At the beginning of last year, investors looked for safe, dependable names–highly visible companies they felt could weather volatility in the market. Experts say we’re likely to see a repeat of that same scenario this year.

Not that you’ll give too much in performance for sticking with Wall Street’s mammoths. Over time, growth, growth & income, capital appreciation and equity income–four Lipper categories that track large-cap funds–have averaged total five-year returns of 16.82%, 17.63% and 17.14%, respectively. Stack that up against a 16.74% record for small-cap funds and 15.45% for mid-caps over the same period, and it’s clear that you haven’t lost much in the way of return.

BOND FUNDS
Pay no attention to the fact that bond funds outperformed their equity counterparts during the last quarter of 1997. Over an extended period, you won’t beat the market investing in bond funds, nor will you exactly hit the jackpot. The proof: domestic long-term fixed income funds, according to Lipper, have returned an average 7% over the last five years compared to nearly 16% for equity (or stock) funds.

So what good is bond fund investing? Well, in a year where the stock market seems destined to pass through some choppy waves, bond funds are a good place to safely stash a part of your portfolio while earning a healthy return on your money. And, the timing couldn’t be better. Experts like Mark Lay of MDL Capital Management (see “How Much Higher?” in this issue) believes rates will fall during the first half of the year, helping bond funds net a nice sum in capital gains.

Make no mistake, however, if you’re looking for the steadiest and safest of yields, we’d recommend buying and holding U.S. Treasury bonds until their maturity. Where stock funds actually diminish risk through a diversified portfolio, bond funds don’t. Bond funds aren’t held to keeping a set portfolio; they can buy and

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