Which Way Is Up?

B.E. provides the answer by offering a slate of funds that will boost the performance of your portfolio

Alex A. Brown, a stuntman who has performed in films from Glory to Rush Hour, knows how to take a fall. But he’s not keen on watching the returns on his investments take a plunge. “There’s a time to be aggressive and a time to be cautious,” the 60-year-old film industry veteran says. “I’ve been following a plan for over 15 years, and I couldn’t be happier.”

Brown’s method is simple but effective. He has bought less stock funds and added more bond funds to his portfolio — a good call in last year’s portfolio-punishing environment. By following this strategy, he and his wife, Karen, 55, have built up a portfolio worth between $250,000 to $300,000.

In 2001, things went from bad to worse for stock fund investors. Recession and war were two major factors that introduced more turbulence into an already volatile market.

Just take a look at the past two years. According to Morningstar Inc., the Chicago-based mutual fund research firm, the average domestic stock fund hardly moved in 2000, earning 0.39%. But there were plenty of places to make money. Healthcare funds gained more than 50% that year, while natural resources, financial, and real estate funds all topped the 25% mark. Among diversified funds, all types of value funds did well, with small- and mid-cap value funds each gaining a healthy 18%.

That was 2000. In 2001, the market was more battered and bruised than a stuntman’s torso. The average domestic fund was down nearly 11%. The following were the biggest losers:
Growth funds. All types of growth funds fell in 2001, especially those that held large-cap companies. The category dipped 24%.

Technology funds. After losing 32% of their value in 2000, tech funds were down another 38% last year.

Specialty funds. Vehicles with a heavy concentration in communications, healthcare, natural resources, and utilities stocks suffered double-digit losses.

International stock funds. Funds that invest in non-U.S. companies fell by a staggering 17%. For the second straight year, Japanese and European funds faltered, plummeting 30% and 21%, respectively.

Believe it or not, investing in 2001 was not all gloom and doom. Where did investors make money — or at least avoid huge losses — last year?

Value funds. “The same investors who were convinced they had to own growth stocks in the late 1990s bought value stocks in 2001, just as they did in 2000, driving up prices,” maintains Scott Cooley, a senior fund analyst at Morningstar. In 2001, small-cap value funds gained more than 17%, mid-cap value funds gained more than 6%, and large-cap value funds (down 5.5%) lost only half as much as the average domestic stock fund.

Precious metals funds. Although these funds were leaders last year, gaining almost 19%, the category provides little for long-term investors to cheer about — having posted negative five- and 10-year returns through the end of 2001. Real estate funds, which produced a 9% return, were runners-up for specialty fund performance leadership.

Bond funds. The flight to safety, however, paid off for a number of investors. Each of the 20 categories of bond funds

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