Funds can be risky business
That mutual fund you bought, figuring it would shield you from pain in the stock market, may turn out to be a wolf in sheep's clothing.
I'm talking about the mutual funds in 401(k) plans, individual retirement accounts and 529 college savings plans that carry the soothing words “moderate allocation” in their names or descriptions. These are the no-brainer funds that have become popular because novices don't have to know much about investing. They simply buy a relatively mild-mannered fund containing stocks and bonds and they're done making decisions.
People with these funds may assume they can go on with their lives, while relying on a fund manager to avoid taking big chances.
But many funds that were cautious after the financial crisis have begun to morph into something different. Fund managers who run a number of “moderate” funds are bulking up on stock and seem to have forgotten they are choosing investments for those who might be afraid of sharp losses.
So if the stock market turns ugly, risk-averse people could be stunned by large losses in retirement and college savings.
Morningstar analyst Greg Carlson recently found that moderate allocation funds that toned down the risk they were taking when investors were afraid in 2008-09 were only temporarily cautious. In February 2009, according to Carlson, the typical moderate-allocation fund had only 55.3 percent of investors' money invested in stocks, with the rest in safer alternatives — bonds and cash.
But by the end of November last year, many funds with conservative reputations shirked the staid approach and channeled a risky 70 to 75 percent into stocks — far more than the 60 percent average usually considered “moderate.”
For a taste of the difference, consider the financial crisis. A person who invested $10,000 just before the market started falling 50 percent in late 2007, and put 70 percent into stocks and 30 percent into bonds, would have had just $6,540 by March 2009. If he were more conservative and put 60 percent in stocks and 40 percent in bonds, he would have had $7,140 left at the scariest moment in 2009.
Three years since suffering the worst losses, the person with 60 percent in stock (the Standard & Poor's 500 index) and 40 percent in long-term bonds recovered and amassed $12,340 in the moderate stock and bond mix. The person with the riskier 70 percent allocation in stocks didn't regain as much, with holdings of $11,725.
None of this might matter if the person has a steel stomach and doesn't worry during the downturns of 20 percent or more that arrive on average every five years. But most do worry and some run away, locking in losses that last for years. So if they know ahead of time that they can't stomach large losses, and consequently choose a moderate allocation fund, that's what they should get — not a more aggressive pretender.
Recently, fund managers have been adding stocks and cutting back on bonds because bonds have been paying so little interest. Also, as interest rates climb in the next few months or years, bonds are likely to lose money too. But financial planner Michael Kitces of Reston, Va., said that's no reason for fund managers to take more risks than usual.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune. Readers may send her email at email@example.com.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Former athletes open businesses
- Typewriters back in style, keeping repair shops busy
- Password change can block hackers from wireless cameras
- Apprenticeship programs fill gaps in American manufacturing
- Workarounds exist for battery woes
- U.S. Steel plans to close two plants affecting 545 workers
- Beaver County power plant cleaning up spill into creek
- Hard-hit worker wonders where the economic resurgence is
- First-time home-buyers expected to pump up sales in 2015
- North Dakota oil boom attracts crime
- $300K in wine bottles stolen from Napa Valley restaurant found in North Carolina cellar