funds were up roughly 13%, bringing the 12-month return for this category to more than 25%–a good year by any standard, but especially so during a period when the broad U.S. stock market was clawed by the proverbial bear. Generally, small-company funds topped the funds that invested in the blue chips while value funds trumped growth funds.
In other words, the market has done a 180-degree turn in a three-year period. Back in 1998, Morningstar’s small value category lost slightly more than 5%, while large growth funds topped the charts, returning more than 33% for the year. Technology funds, which gained 54% in 1998 and an amazing 137% in 1999, lost 33% in 2000 before dropping a further 26% in the first half of 2001, as mentioned.
Other specialized funds have seen similar reversals. Precious metals funds, which lost money during the booming 1990s, posted a 13% gain in the first half of 2001. “That gain probably was the result of investors becoming defensive with their money,” says Benz. “The price of gold really hasn’t moved up. However, if the world economy falls into recession and stocks continue to slide, precious metals might be a safe haven.”
Real estate funds had a decent first half, too, returning more than 8%, on top of a gain of more than 26% in 2000. But real estate funds lost money in 1998 and 1999, so they’re still on the rebound. “The move to value stocks has helped real estate funds,” says Benz. “In addition, real estate stocks offer relatively high yields and a way to participate in an economic recovery.”
SCORING WITH EQUITIES
Mitchell, who recently retired after 35 years with a local phone company (now Verizon), believes in stocks so much that her portfolio is 100% invested in equities, mainly stock funds. The conventional wisdom is that retirees should turn conservative, with a healthy allocation of their portfolios to bonds and bond funds, but “she’s a very young retiree, in her early 50s,” maintains Mitchell’s advisor, Charlene D. Monts, an assistant vice president and senior financial advisor in the private client group at Merrill Lynch in Baltimore. “We must plan on a long retirement. She’ll need growth in her investments to maintain a comfortable lifestyle, and stocks are likely to provide long-term growth.”
Mitchell passed up a pension and rolled over all of her retirement funds into an IRA, which is currently invested in five equity funds: AIM Blue Chip, AIM Value, AIM Weingarten, American Funds Growth, and Washington Mutual Investors. “Her portfolio is fairly evenly divided among those funds,” says Monts, “with slightly more in Washington Mutual, which has a strong record going back nearly 50 years. These are funds that invest in high-quality companies, growth and value, so Marcia has a portfolio designed to keep her from losing sleep. We don’t anticipate any changes in the near future, even if the stock market remains volatile.”
Some investors are pursuing a similar strategy, counting on long-term gains from the equity markets even though their advisors would recommend