The Good, The Bad, And The Average

A record number of folks jumped on the investment bandwagon in 1996 in search of '95's lofty gains. Last year was nearly as good, but '97 might prove to be a letdown.

It seemed that investors from new york city to Los Angeles were dancing in the streets at the start of last year. And why not? Nineteen ninety-five was one of the best ever for mutual funds- equity funds were up 31.08% compared with the overall S&P 500 stock index of 37.5%. But by the end of 1996, the tempo had slowed, although the year overall wasn’t anything to frown at. The average stock fund rose about 20% in 1996 versus 22.96% for the S&P 500.

The past two years have been a class act, say industry gurus. The Dow Jones industrial average climbed more than 2,600 points, the S&P 500 soared 69.17% and the average general stock fund gained a total of 56.23% during 1995 and 1996. That represents the best back-to-back performance since 1979 and 1980, which had a total 75.10% gain, according to Lipper Analytical Services Inc. in Summit, NJ, which analyzes and tracks more than 31,000 funds worldwide.

In fact, a record $222.08 billion poured into equity mutual funds in 1996, with total assets of all funds climbing to $3.54 trillion, according to the Investment Co. Institute (ICI) in Washington, D.C. The average monthly deposit into mutual funds was $18.5 billion, compared with $10.7 billion in 1995.

Today, an estimated 63 million Americans own mutual funds. A big factor for the widespread popularity is a boom in retirement accounts. ICI estimates that through the end of 1995, retirement assets–401(K)S, 403(b)s, pensions and individual retirement accounts–accounted for nearly 36% of all mutual fund assets. Companies are increasingly offering 401(k) plans to their employees and are constantly adding to the number of mutual fund options within those plans.

It was clear in 1996 that the best performing sectors were natural resources funds (up 32.74%); real estate funds (up 30.80%) and financial services (up 28.01%). This stands to reason, says A. Michael Lipper, CPA and president of Lipper Analytical Services, “given that real estate funds invest in REITs (real estate investment trusts), which are currently awash with cash; financial services funds invest in some of the world’s biggest banks; and natural resource funds own some of the world’s biggest oil companies.”

What can investors hope for this year? The forecast for 1997 is mild in comparison to the last two years. A tumultuous storm isn’t on the horizon–just a slight correction, meaning share prices might surrender some of their heady gains at some point during the year. The economy is expanding slowly but steadily. Inflation and interest rates remain low and aren’t likely to rise and if they do, only slightly. Wall Street sages aren’t predicting Armageddon–just the end of high double-digit market gains.

“Going forward, one would expect domestic stock fund performance to return to more normal levels–the 12% range,” says Lipper. No matter. The prudent investor knows that mutual funds should be viewed as longterm investments. And mutual funds–particularly equity funds–remain the best place for investors to park their money.

YEAR IN REVIEW: THE LAST ROUNDUP
The biggest lesson of 1995 and 1996 is that

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