TribLIVE

| Business

 
Larger text Larger text Smaller text Smaller text | Order Photo Reprints

Funds can be risky business

Email Newsletters

Click here to sign up for one of our email newsletters.

On the Grid

From the shale fields to the cooling towers, Trib Total Media covers the energy industry in Western Pennsylvania and beyond. For the latest news and views on gas, coal, electricity and more, check out On the Grid today.

Daily Photo Galleries

'American Coyotes' Series

Traveling by Jeep, boat and foot, Tribune-Review investigative reporter Carl Prine and photojournalist Justin Merriman covered nearly 2,000 miles over two months along the border with Mexico to report on coyotes — the human traffickers who bring illegal immigrants into the United States. Most are Americans working for money and/or drugs. This series reports how their operations have a major impact on life for residents and the environment along the border — and beyond.

Sunday, Jan. 12, 2014, 9:00 p.m.
 

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 gmarksjarvis@tribune.com.

Subscribe today! Click here for our subscription offers.

 

 


Show commenting policy

Most-Read Business Headlines

  1. FirstEnergy to build coal waste processing facility in Beaver County
  2. Small business hangs on fate of Export-Import Bank
  3. $2-per-gallon gas expected by year’s end, but not in Western Pa.
  4. Muni bond funds stressed
  5. Jaguar XJ flagship struggles to keep pace
  6. Chevy tweaks its truck remake
  7. 3 vehicles to keep an eye on for 2016
  8. FedEx faces in-depth probe of bid to buy Dutch express company
  9. Trib 30 index slips in July; 29 percent drop makes ATI biggest loser
  10. Low fuel pressure may have easy fix
  11. Insurers: F-150’s aluminum costly to repair