No risk, no reward. It’s a plain-spoken maxim that Richard Marshall Jr. lives by. The U.S. Navy commander, who currently lives in Alexandria, Virginia, and works at the Pentagon, invests in mutual funds and seeks to supercharge his holdings.
His personal situation allows him to take some risks. He’s single and without major financial pressures. He doesn’t have to worry about house or car payments eating into his cash flow. A naval officer since 1991, he’s within sight of 20 years of service, which will entitle him to a lifelong pension. Moreover, Joe E. Outlaw, president of San Diego-based PenTrust Financial Services and Marshall’s financial planner, says that “Richard has the kind of personality that allows him to sleep at night, even if the market is down. He knows he’s in for the long term.”
Marshall has followed Outlaw’s suggestion that he reduce his exposure to domestic stock funds, real estate funds, and bond funds. “My portfolio now includes 55% in international funds and 25% in global funds,” Marshall says. (Global funds invest in U.S. and foreign companies while international funds focus solely on offshore stocks.)
He’s decided not to sit on the sideline because of market turbulence. But a number of investors have become increasingly cautious due to economic uncertainty. With consumer prices up 4.1% in 2007, inflation was pushed up by the largest amount in 17 years. Now the prospect of recession looms as inflation threatens to rise even further. Oil prices spike as the value of the dollar slides. Housing prices continue to plummet as mortgage defaults increase. Investors witnessed a sharp downturn in the stock market in the first weeks of this year–the S&P 500 declined 6.1% in January alone.
There’s every indication that the market in the coming months will prove to be even more tumultuous. For instance, the Chicago Board Options Exchange’s Volatility Index, which measures market swings, roughly doubled from early 2007 to early 2008. For instance, in a mere three months, from October 2007 to January 2008, the Dow dropped by 14.5%. If you were sitting on a $200,000 nest egg last October, one that moved in sync with the Dow, you’d suddenly be facing the future with only $171,000 to tap.
These factors led Marshall, 39, to tilt his portfolio sharply to non-U.S. holdings. In fact, his largest position is now in Oppenheimer Developing Markets Fund (ODMAX), which is classified as an emerging markets fund. Such vehicles are considered among the riskiest of all stock funds because they invest in countries that may have light stock market regulation, political turmoil, hyperinflation, and currency devaluations.
For taking such chances, investors may be well rewarded. That turned out to be the case for Marshall, who saw his fund, which invests heavily in Brazilian and Indian equities, return nearly 34% in 2007. “My other international and global stocks also did well,” he says. To achieve his lofty returns for his portfolio–which is worth $200,000–the top gun doesn’t own a single bond fund and only 5% of his holdings is in cash.
Marshall was willing to pursue aggressive strategies to realize sizable returns. But that doesn’t mean you should approach investing the same way. To evaluate where you stand, follow market activity closely, determine your risk tolerance level, and seek solid financial advice. black enterprise has also developed The Moneywise 100–our semiannual guide to 100 mutual funds that merit your attention. Working with Chicago-based mutual fund research firm Morningstar, we’ve identified funds based on criteria including three- and five-year returns in the top quartile of their respective categories and, for the first time, indicated risk ratings for each.
More Volatility
Even though recent events have reminded many that investing can be a risky business, the outlook is not entirely gloomy. The stock market has had many corrections and crashes over the years, yet investors who tolerated the downs have enjoyed the ups: Long term, stocks have delivered much higher returns than bonds or bank accounts. For a quarter of a century–from late 1982 to 2007–economic historians maintain that the stock market has produced a total return of more than 2,000%.
In fact, last year turned out to be a good time to take certain types of risks. International stock funds returned nearly 16%, on average, while domestic stock funds gained about 6%. Among foreign stock funds, the leaders were specialized categories such as Latin America (up 46%), Pacific/Asia, excluding Japan (48%), and diversified emerging markets (37%). Japanese stock funds, on the other hand, lost more than 9%. The narrower a fund’s focus, the more risk investors assume.
Sector funds also demonstrated this risk—reward tradeoff. Top performers included those with holdings in natural resources (37%), precious metals (23%), and utilities (20%), while investors were punished if they held funds specializing in financial firms (-12%) or real estate (-15%).
Test Your Tolerance
These days many investors are seeking the safety of money market funds. “There are three main reasons for investing in a money market fund,” says Dail St. Claire, president of New York-based Williams Capital Management Trust. “They are preservation of capital, liquidity, and generating income.”
In today’s environment, the first two are far more important, according to St. Claire. That is, protecting against loss and having access to your money should be prime concerns, rather than seeking an extra quarter-point of yield.
“Do your homework,” St.
Claire says. “Before investing in a money market fund, read the prospectus as well as statement of additional information, or SAI, and the one-page fact sheet. See if the fund is identified as a ‘2a7′ fund. Those funds are subject to federal regulations on portfolio maturity, credit quality, diversification, and liquidity.”Overall, putting together a mutual fund portfolio that matches your risk threshold can prove challenging. First, determine how much market turbulence you can stomach. You can take a risk tolerance quiz online at BlackEnterprise.com. “If you work with a financial adviser, you should go through this kind of exercise before making any investments,” says Outlaw.
Find the Right Mix of Funds
Experts say most investors have moderate or slightly lower-than-moderate risk tolerance levels. Once you have some idea of whether you are Bold Bart or Nervous Nellie, you can begin the process of constructing your mutual fund portfolio. David Kathman, a fund analyst at Morningstar, says you should first determine the risk of various fund categories.
“Risk is often equated with volatility,” says Kathman, “and the most common way to measure the volatility of an investment is standard deviation.” In essence, standard deviation reflects historic swings in investment returns. The wider the swings, the greater the risk investors will face. So, historically, a large blend fund–a mix of large-company growth and value stocks–would provide far less risk than specialty funds, such as those that invest in precious metals. During the past five years, however, precious metals funds returned nearly 22% a year on average, twice as much as large blend funds. Therefore, risk-takers were rewarded.
A more audacious investor, then, might start off with a core holding of large-company domestic and international stock funds. Smaller-company funds, specialized sector funds, and emerging markets funds could be added, in search of higher returns. Fixed-income investments would be virtually nonexistent in his or her portfolio.
What about investors with very little taste for risk? “I’d recommend a large allocation to bond funds,” says Outlaw. All fixed-income investments–including those that hold low-rated j
unk bonds–tend to provide more safety than any stock fund category.
Once you’ve decided on your mix of fund categories, the next step is to pick funds within each class. Always focus on past performance, expense ratios, asset turnover ratios, and the tenure of fund managers, among other key elements. Another risk gauge: five- or 10-year returns.
Morningstar’s Kathman also suggests taking a critical view of portfolio diversification. For instance, a fund with 30 holdings might prove to be more volatile than a vehicle with 50 stocks.
One way to size up the best funds is to review our Moneywise 100 listing; we have taken into account all of the aforementioned factors. As a rule, however, evaluate risk for yourself before investing a single dollar to determine if a fund will provide the ups and downs of a rollercoaster ride or keep you on solid ground.
THE MONEYWISE 100
| Fund Name | Ticker Symbol | 5-Year Return | 5-Year Risk Rating | Expense Ratio | Minimum Initial Investment | Website |
| Columbia Marsico 21st Century Z | NMYAX | 21.7% | Above Avg | 1.01 % | $0 | www.columbiafunds.com |
| Amana Trust Growth | AMAGX | 19.7 | Average | 1.35 | 250 | www.amanafunds.com |
| American Funds New Economy F | ANFFX | 15.9 | Above Avg | 0.76 | 250 | www.americanfunds.com |
| American Funds Growth Fund of Amer F | GFAFX | 15.0 | Below Avg | 0.61 | 250 | www.americanfunds.com |
| Transamerica Premier Equity Inv | TEQUX | 14.9 | Average | 1.15 | 1,000 | www.transamerica.com |
| Jennison Blend Z | PEQZX | 14.7 | Average | 0.64 | 0 | www.jennisondryden.com |
| AIM Summit P | SMMIX | 14.7 | width=”9%” valign=”top”>Average | 0.92 | 0 | www.aiminvestments.com |
| Excelsior Large Cap Growth | UMLGX | 14.5 | Above Avg | 1.20 | 2,500 | www.excelsiorfunds.com |
| Waddell & Reed Adv Vanguard Y | WAVYX | 13.9 | Above Avg | 0.86 | 0 | www.waddell.com |
| Sit Large Cap Growth | SNIGX | 13.4 | Low | 1.00 | 5,000 | www.sitfunds.com |
|
Large Value |
||||||
| RiverSource Diversified Equity Inc R4 | IDQYX | 19.2 | High | 0.89 | 2,000 | www.riversource.com |
| Excelsior Value & Restructuring | UMBIX | 18.7 | High | 1.05 | 2,500 | www.excelsiorfunds.com |
| 1st Source Monogram Income Equity | FMIEX | 17.2 | Above Avg | 1.15 | 1,000 | www.1stsource.com |
| American Beacon Lg Cap Value AMR | AAGAX | 16.9 | Average | 0.32 | 0 | www.americanbeaconfunds.com |
| Monteagle Value | MVRGX | 16.4 | High | 1.22 | 2,000 | www.memorialfunds.com |
| RiverSource Equity Value R4 | AEVYX | 16.3 | Above Avg | 0.93 | 0 | www.riversource.com |
| DFA Tax-Managed U.S. Marketwide Value II | DFMVX | 16.2 | High | 0.24 | 0 | www.dfafunds.com |
| Seligman Large Cap Value I | SLVIX | 16.0 | Above Avg | 0.97 | 0 | www.seligman.com |
| Vanguard Value Index | VIVAX | 14.5 | Average | 0.21 | 3,000 | www.vanguard.com |
| MFS Value I | MEIIX | 14.5 | Low | 0.76 | 0 | www.mfs.com |
| “TOP” COLSPAN=”7″>
Large Blend |
||||||
| Janus Contrarian | JSVAX | 26.7 | High | 0.94 | 2,500 | www.janus.com |
| Fairholme | FAIRX | 18.8 | Above Avg | 1.00 | 2,500 | www.fairholmefunds.com |
| Neuberger Berman Partners Inv | NPRTX | 17.4 | High | 0.80 | 1,000 | www.nb.com |
| American Funds Fundamental Invs F | AFIFX | 17.3 | Above Avg | 0.58 | 250 | www.americanfunds.com |
| FMI Large Cap | FMIHX | 15.5 | Low | 1.00 | 1,000 | www.fiduciarymgt.com |
|
Mid-Cap Growth |
||||||
| BlackRock U.S. Opportunities Svc | BMCSX | 21.4 | Average | 1.40 | 5,000 | www.blackrock.com |
| Roosevelt Anti-Terror Multi-Cap | BULLX | 18.3 | Low | 1.28 | 1,000 | www.anti-terrorfund.com |
| Dreyfus Premier S&P Stars Opp I | DSORX | 18.2 | Average | 1.15 | 1,000 | www.dreyfus.com |
| Neuberger Berman Mid Cap Growth Inv | NMANX | 16.9 | Above Avg | 1.02 | 1,000 | www.nb.com |
| Sit Mid Cap Growth | NBNGX | 16.8 | Average | 1.15 | 5,000 | www.sitfunds.com |
|
Mid-Cap Value |
||||||
| RiverSource Mid Cap Value R4 | RMCVX | 22.2 | Above Avg | 1.10 | 2,000 | www.riversource.com |
| Columbia Mid Cap Value Z | NAMAX | 18.1 | Average | 0.87 | 0 | www.columbiafunds.com |
| Allegiant Mid Cap Value I | ARVIX | 17.6 | Average | 0.93 | 0 | www.allegiantfunds.com |
| Delafield | DEFIX | 17.5 | Above Avg | 1.32 | 5,000 | www.delafieldfund.com |
| Heartland Select Value | HRSVX | 16.6 | Above Avg | 1.25 | 1,000 | www.heartlandfunds.com |
|
Small-Cap Growth |
||||||
| Winslow Green Growth | WGGFX | 24.5 | High | 1.45 | 5,000 | www.winslowgreen.com |
| Excelsior Small Cap | UMLCX | 18.6 | Average | 1.22 | 2,500 | www.excelsiorfunds.com |
| BlackRock Small Cap Grth Equity Svc | PCGEX | 18.3 | Average | 1.02 | 5,000 | www.blackrock.com |
| TCW Small Cap Growth I | TGSCX | 16.7 | Above Avg | 1.29 | 2,000 | www.tcw.com |
|
Small-Cap Value |
||||||
| Columbia Small Cap Value II Z | NSVAX | 17.3 | Average | 1.02 | 0 | www.columbiafunds.com |
| Columbia Small Cap Value I Z | CSCZX | 16.0 | Average | 1.04 | 2,500 | www.columbiafunds.com |
| Franklin Small Cap Value R | FVFRX | 15.9 | Average | 1.40 | 1,000 | www.franklintempleton.com |
| JHT Small Company Value Trust Ser I | N/A | 15.4 | Below Avg | 1.08 | 0 | www.jhannuities.com |
| Â
GN=”CENTER”>Diversified Emerging Markets |
||||||
| DFA Emerging Markets Value I | DFEVX | 41.8 | Above Avg | 0.60 | 0 | www.dfafunds.com |
| Fidelity Emerging Markets | FEMKX | 35.1 | Above Avg | 1.01 | 2,500 | www.fidelity.com |
| T. Rowe Price Emerging Markets Stock | PRMSX | 34.8 | Above Avg | 1.25 | 2,500 | www.troweprice.com |
source: morningstar inc. morningstar makes every effort to ensure the accuracy AND COMPLETENESS of this data, but cannot guarantee it.
Top funds in each category, ranked by FIVE-year returns. etfs ranked by three-year returns with a minimum investment of $5,000 or less. returns through 1/30/08.
The Moneywise 100
| Fund Name | Ticker Symbol | 5-Year Return | 5-Year Risk Rating | Expense Ratio | Minimum Initial Investment | Website |
|
Foreign Large Value |
||||||
| Dodge & Cox International Stock | DODFX | 25.7% | High | 0.66% | $2,500 | www.dodgeandcox.com |
| DFA Intl Value I | DFIVX | 25.6 | Above Avg | 0.44 | 0 | www.dfafunds.com |
| Harbor International Inv | HIINX | 25.0 | High | 1.19 | 2,500 | www.harborfunds.com |
| DFA Tax-Managed Intl Value | DTMIX | 25.0 | Above Avg | 0.54 | 0 | www.dfafunds.com |
| Thomas White International | TWWDX | 24.6 | High | 1.42 | 2,500 | www.thomaswhite.com |
| Vanguard International Value | VTRIX | 22.5 | Above Avg | 0.45 | 3,000 | www.vanguard.com |
|
Foreign Large Blend |
||||||
| Fidelity Canada | FICDX | 27.8 | High | 0.97 | 2,500 | www.fidelity.com |
| Elfun International Equity | EGLBX | 24.0 | Above Avg | 0.18 | 500 | www.gefunds.com/elfun |
| Sextant International | SSIFX | 22.9 | Above Avg | 1.02 | 1,000 | www.saturna.com |
| New Century International | NCFPX | 22.8 | High | 1.35 | 1,000 | www.newcenturyportfolios.com |
| Fidelity International Discovery | FIGRX | 22.7 | Above Avg | 1.00 | 2,500 | www.fidelity.com |
| American Funds EuroPacific Gr F | AEGFX | 21.6 | Average | 0.78 | 250 | www.americanfunds.com |
| Manning & Napier World Opportunities A | EXWAX | 21.4 | Average | 1.16 | 2,000 | www.manningnapieradvisors.com |
| American Funds EuroPacific Gr 529E | CEUEX | 21.2 | Average | 1.11 | 250 | www.americanfunds.com |
| GE International Equity Y | GEIDX | 21.1 | Above Avg | 1.20 | 500 | www.gefunds.com |
| ING Julius Baer Foreign S | IJBSX | 20.9 | Above Avg | 1.13 | 0 | www.ingfunds.com |
| UMB Scout International | UMBWX | 20.6 | Low | 0.97 | 1,000 | www.umb.com |
|
Sector |
||||||
| Matthews Asian Technology | MATFX | 23.8 | Average | 1.39 | 2,500 | “TOP”>www.matthewsfunds.com |
| Turner New Enterprise | TBTBX | 22.6 | High | 1.61 | 2,500 | www.turnerinvestments.com |
| Waddell & Reed Adv Science & Tech Y | USTFX | 17.8 | Low | 1.01 | 0 | www.waddell.com |
| BlackRock Global Sci & Tech Opp Svc | BSTSX | 16.0 | Below Avg | 1.73 | 5,000 | www.blackrock.com |
| Fidelity Select Medical Delivery | FSHCX | 20.7 | Above Avg | 0.94 | 2,500 | www.fidelity.com |
| T. Rowe Price Health Sciences | PRHSX | 17.4 | Average | 0.87 | 2,500 | www.troweprice.com |
| VALIC I Health Sciences | VCHSX | 16.7 | Above Avg | 1.17 | 0 | www.aigvalic.com |
| JHT Health Sciences Trust Ser I | JEHSX | 16.4 | Average | 1.16 | 0 | www.jhannuities.com |
| Hartford Global Health HLS IA | HIAHX | 13.7 | Average | 0.87 | 0 | www.hartfordlife.com |
| U.S. Global Investors WrldPrecMineral | UNWPX | 37.0 | Above Avg | 0.99 | 5,000 | www.usfunds.com |
| USAA Precious Metals and Minerals | USAGX | 32.8 | Average | 1.21 | 3,000 | www.usaa.com |
| Alpine International Real Estate | EGLRX | 25.8 | Low | 1.14 | 1,000 | www.alpinecef.com |
| ING Van Kampen Real Estate S | IVRSX | 21.1 | Average | 0.90 | 0 | www.ingfunds.com |
|
Intermediate Bond |
||||||
| Metropolitan West Total Return Bond M | MWTRX | 7.3 | Average | 0.65 | 5,000 | www.mwamllc.com |
| Managers Bond | MGFIX | 6.6 | High | 0.99 | 2,000 | www.managersfunds.com |
| Westcore Plus Bond | WTIBX | 6.5 | Below Avg | 0.55 | 2,500 | www.westcore.com |
| Baird Core Plus Bond Inv | BCOSX | 6.0 | Average | 0.55 | 2,500 | www.rwbaird.com |
| Principal Inv Income Inst | PIOIX | 5.7 | Above Avg | 0.51 | 0 | www.principal.com |
| Vanguard Interm-Term Bond Index | VBIIX | 5.4 | High | 0.18 | 3,000 | www.vanguard.com |
| TCW Core Fixed-Income I | TGCFX | 5.3 | Average | 0.50 | 2,000 | www.tcw.com |
| TCW Total Return Bond I | TGLMX | 5.1 | Low | 0.44 | 2,000 | www.tcw.com |
| Vanguard Interm-Term Investment-Grade | VFICX | 5.1 | Above Avg | width=”9%” valign=”top”>0.21 | 3,000 | www.vanguard.com |
| T. Rowe Price New Income | PRCIX | 4.9 | Average | 0.66 | 2,500 | www.troweprice.com |
|
High Yield Bond |
||||||
| Fidelity Advisor High Income Advantage I | FAHCX | 13.8 | High | 0.81 | 2,500 | www.fidelity.com |
| Principal Inv High Yield II Inst | PHYTX | 12.7 | Above Avg | =”TOP”>0.53 | 0 | www.principal.com |
| Fidelity Capital & Income | FAGIX | 12.4 | High | 0.75 | 2,500 | www.fidelity.com |
| Julius Baer Global High Income A | BJBHX | 10.7 | Above Avg | 1.08 | 1,000 | www.us-funds.juliusbaer.com |
| Putnam High Yield Advantage Y | PHAYX | 10.6 | Average | 0.79 | 500 | www.putnaminvestments.com |
| RiverSource High Yield Bond R4 | RSHYX | 10.0 | Average | 0.93 | 2,000 | www.riversource.com |
| Putnam High Yield Y | PHYYX | 9.8 | Average | 0.78 | 500 | www.putnaminvestments.com |
| American Funds American Hi Inc Tr F | AHTFX | 9.8 | Average | 0.67 | 250 | www.americanfunds.com |
| Wells Fargo Advantage High Income I | SHYYX | 9.7 | Below Avg | 0.43 | 0 | www.wellsfargofunds.com |
| Fidelity Advisor High Income Advantage I | FAHCX | 13.8 | High | 0.81 | 2,500 | www.fidelity.com |
| Principal Inv High Yield II Inst | PHYTX | 12.7 | Above Avg | 0.53 | 0 | www.principal.com |
| Fidelity Capital & Income | FAGIX | 12.4 | High | 0.75 | 2,500 | www.fidelity.com |
| Julius Baer Global High Income A | BJBHX | 10.7 | Above Avg | 1.08 | 1,000 | www.us-funds.juliusbaer.com |
| Putnam High Yield Advantage Y | PHAYX | 10.6 | Average | 0.79 | 500 | www.putnaminvestments.com |
| RiverSource High Yield Bond R4 | RSHYX | 10.0 | Average | 0.93 | 2,000 | www.riversource.com |
| Putnam High Yield Y | PHYYX | 9.8 | Average | 0.78 | 500 | www.putnaminvestments.com |
| American Funds American Hi Inc Tr F | AHTFX | 9.8 | Average | 0.67 | 250 | www.americanfunds.com |
| Wells Fargo Advantage High Income I | SHYYX | 9.7 | Below Avg | 0.43 | 0 | www.wellsfargofunds.com |
source: morningstar inc. morningstar makes every effort to ensure the accuracy AND COMPLETENESS of this data, but cannot guarantee it.
Top funds in each category, ranked by FIVE-year returns. etfs ranked by three-year returns with a minimum investment of $5,000 or less. returns through 1/30/08.
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