Diversify & Conquer


While oil prices soared from roughly $43 per barrel in early January to more than $55 by midyear, the broad market hasn’t performed nearly as impressively. In fact, with a few exceptions, neither stock nor bond funds have taken off.

So what’s an investor to do? Diversification is the key. “I mix it up,” says Steve Noakes, a consultant who specializes in information security in Falls Church, Virginia. “I have funds holding small-, mid-, and large-cap stocks, along with international stocks.” This approach puts Noakes in a position to gain if one area of the market gets hot, and it protects him against steep losses such as those suffered by tech-heavy investors from 2000 to 2002.

For the last 15 years, Noakes has invested in Fidelity Destiny II, a fund that held 111 different stocks at last report. With this fund, investors commit to monthly contributions for at least 10 years.

“Investors should have a little bit of everything,” says Ivory Johnson, director of financial planning at The Scarborough Group in Annapolis, Maryland. “Every asset class has its day in the sun, and you can’t predict which will shine in the next six months. By filling in all the categories, you can reduce the volatility of your portfolio.”

Johnson says real estate mutual funds are among his most desirable holdings. The following were key trends in mutual fund performance in the first half of the year:

Domestic stock funds posted slight losses (performance was down less than 1%). Value funds topped growth funds. Mid value, small value, real estate investment trusts, corporate bonds, and emerging markets were all up more than 2%.

After natural resources, stock funds were led by two other niche categories: Latin American funds (up 11.78%) and utilities funds (up more than 10%).

ooOn the bright side, there were no enormous losers. The worst performers were precious metals funds and technology funds, both down more than 5%.

World stock funds, too, posted modest losses in the first half. Emerging markets stock funds (up 4.92%) did well.

Emerging markets bond funds did even better, up 5.28%. More traditional bond funds generally provided smaller returns to investors.

Investors are hoping performances during the second half fare a bit better. “There are no obvious answers,” says Cheryl Holland, president of Abacus Planning Group in Columbia, South Carolina.

Suppose, instead of diversifying, you put all your money into large-cap growth funds. Such funds are expected to be long-term winners but they can suffer severe losses in any given year. “If you’re down 30% one year,” says Johnson, “you have to gain 43% just to get back to where you were. By spreading your investments, you reduce the risk of taking such a huge loss.”

Noakes’ approach to investment is a mixed bag.

For example, 2002 was the worst year in recent memory for domestic stock funds (down more than 22%), while bond and real estate funds registered gains. A diversified portfolio would have experienced losses much less than 22%.

Investing regularly as Noakes has done with Fidelity Destiny II is known as dollar-cost averaging,


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