Funds can be risky business

Gail MarksJarvis
| 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

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