Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, January 23, 1995 TAG: 9501250022
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
What should you do now? Should you cut and run back to the insured safety of a bank certificate of deposit? Or do you grit your teeth and hope for a better performance in 1995?
One point to remember is that the statement shows an annual summary. The loss might have occurred in June, said Hope Player, a certified financial planner and certified public accountant in Roanoke. But, she said, most people don't really realize the extent of their loss until the annual report arrives.
T. Michael Smith, president of Ferguson, Andrews & Associates in Roanoke, said what's happening is that a lot of first-time investors in mutual funds are receiving their first annual reports. Accustomed to more-stable financial products, they are shocked to discover that they have actually lost some of their principal.
Smith tells such clients that mutual funds are long-term investments, meaning the clients should not sell out of the fund because they lost money one year.
If you go back to 1926 and measure in rolling 15-year periods, Smith said, there has never been a time in any period when people lost money in the stock market. In other words, you can take any 15-year period - "you pick it," Smith said - and you would have made money if you had invested at the start. That's true even though the market was down during 23 years of the 69 years since 1926.
History tells us, Smith said, that there has never been a loss of money in the stock market or a mutual fund provided it was invested for the long term. His advice is to remain in the fund and determine to hold out for a period of years.
If people are not willing to do that, Smith said, he tells them they are in mutual funds for the wrong reason. If so, he said, ``get out and invest in something else.''
John C. Parrott II, a certified financial planner with Wheat First Butcher Singer in Roanoke, advises his clients to invest in mutual funds for no less than three to five years. That length of time is needed for funds to outperform the rate of inflation, he said.
But a poor performance, he said, might raise a flag that the fund should be compared with its peer group, or those funds with the same investment philosophy and equal risk. If, for example, a balanced fund logs an inferior gain compared with other balanced funds, it's time to find out the reason. One reason may be high management fees.
If there's good reason, Parrott said, move out of the particular fund. But if the fund equals its peers, ``stay the course.''
Parrott also expects the bond market to level out in the coming months. ``Most of the carnage is over,'' he said.
David Cissel, a fee-only planner with Financial Solutions of Roanoke, would treat stock funds differently from bond funds.
He said people should be aware that stock funds may be volatile over short periods of time, thus producing negative results periodically. Still, the stock market has historically outperformed other types of investments.
Investors should not make quick decisions based on one period, Cissel said, and the worst possible choice is to jump in and out of funds chasing ``the last hot idea.'' The fund with the most recent best performance will likely not do well in the next period.
The arrival of the annual report is a time to take stock and ask whether you understand the fund's philosophy and objectives. Cissel said it's an opportunity to ask if you really know what you invested in.
If the fund has lagged the market in the past few years, he said, it's also time to determine whether you might be better served by another fund.
He suggested that investors check their fund with Morningstar rating service, which tracks and rates mutual funds. It uses a star system, with five stars the best rating. Cissel said many public libraries have the Morningstar reports.
Cissel said he would prefer to own corporate or government bonds rather than a bond fund.
The value of a bond goes up or down inversely with interest rates. A fund may never recover the loss on bonds it sells while interest rates are rising and the values are dropping, Cissel said. But an investor in bonds gets back the face value at maturity regardless of fluctuations in the interim, he said.
Player said the best type of fund for each investor depends on the total investment portfolio of each individual, along with his long range goals and purposes.
If there is any question about a fund, she said, people should consult their financial advisers about their goals and decide on a course of action.
by CNB