Three Solid Low-Risk Funds
Here’s the lowdown on three low-risk funds. The Clipper Fund (800-776-5033; $5,000 minimum investment, no load) buys undervalued shares of neglected companies and holds large stakes of cash or bonds when the managers can’t find stocks that fit their investment profile. The fund’s long-term performance has been strong. It has gained 19% annually during the past decade, placing it in the top ten percent of funds in its category. What’s more, the fund has been more than 25% less volatile than the typical domestic stock fund during the same time period.
Mutual Beacon Fund (800-342-5236; $1,000 minimum; 5.75% load) invests in bargains among out-of-favor companies, including turnarounds and companies that are restructuring. This strategy has paid off for the fund, garnering it a 16.4% gain in 1999; meanwhile the fund has been roughly 30% less risky than the typical domestic stock fund.
PBHG Large-Cap Value picks inexpensive stocks of firms that have delivered higher-than-expected profits. The fund holds growth stocks that are trading at cheaper valuations than other stocks in their industries. It’s been able to remain close to 30% less volatile than the average domestic stock fund.
That kind of stability will come in mighty handy during the next stock market slump.
The easy alternative is to shift cash from stock funds to money market funds. Such funds invest in low-yielding, short-term securities such as Treasury bills or commercial paper. Money funds are immune to stock market slumps, rising interest rates, recessions and just about anything else you can name, and on the surface that seems like the ideal place to stash your cash.
Reducing Downside Risk
But there’s a problem with these investments. Trouble is, money funds can't provide you with the kind of growth that you'll need to outpace inflation over time. In fact, once you've factored in inflation and paid taxes on your returns from a money fund, you'll probably find that your purchasing power has shrunk.
Fortunately, there are a number of ways to reduce the risk in your fund portfolio without giving up on investment growth.
For starters, you probably should avoid investing a large stake in the very riskiest funds. For example, sector funds invest all of their assets in a single industry or sector of the stock market. Often, a sector fund will deliver exceptionally strong gains one year and then hit a wall. Kinetics Internet delivered a staggering 216.4% gain in 1999. It then proceeded to lose more than a third of its value in nine months.
Seductive Turkeys
Some supposedly diversified funds act a bit like sector funds at times. For example, many funds loaded up on technology stocks during 1999, and suffered significant losses when that sector stumbled this year.
Finally, some funds make big bets on high-flying growth stocks of tiny companies or emerging stock markets in countries ranging from Brazil to Taiwan. Under the guidance of the right managers, such funds can offer significant gains over long periods — but in the wrong hands, they can deliver a body blow to your portfolio. If you hold shares in an aggressive stock fund, make sure that you know the manager's record.
Once you've pruned the potential disasters from your portfolio, you can set about finding replacements. Ideally, you should look for funds that have held up reasonably well in bear markets or corrections, while delivering solid returns over longer periods.
