mutual fund you bought, figuring it would shield you
from pain in the stock market, may turn out to be a wolf
in sheepís clothing.
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 donít have to know much about
investing. They simply buy a relatively mild-mannered
fund containing both stocks and bonds and then theyíre
done making decisions.
with these funds may assume they can go on with their
lives, while relying on a fund manager to avoid taking
big chances in the stock market.
many funds that were cautious after the financial crisis
have begun to morph into something very different. Fund
managers that 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.
if the stock market turns ugly, risk-averse people could
be stunned by large losses in retirement and college
analyst Greg Carlson recently found 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 investorsí money invested in stocks, with the rest
in safer alternatives ó bonds and cash.
by the end of November last year, many funds with
conservative reputations had shirked the conservative
approach and channeled a relatively risky 70 to 75
percent into stocks. Some of the moderate allocation
funds that have added risk are Dodge & Cox Balanced,
Fidelity Puritan, Invesco Equity and Income, and Oakmark
Equity and Income, Carlson said.
70 percent of an investorís money in stocks is a
fairly large proportion and could mean big losses in a
sharp stock market downturn. It is far higher than the
60 percent average thatís usually considered
a taste of the difference, consider the financial
crisis. If a person had $10,000 invested just before the
stock market started falling 50 percent in late 2007,
and put 70 percent into stocks and 30 percent into bonds
then, he would have had only about $6,540 left by March
2009. If instead he had been more conservative, and had
60 percent in stocks and 40 percent in bonds, he would
have had $7,140 left at the scariest moment in 2009.
Because the person with a bigger chunk of money in
stocks lost more money, it took him longer to get back
years after suffering the worst losses, the person with
60 percent in stock (the Standard & Poorís 500
index) and 40 percent in long-term government bonds had
not only recovered, but had amassed a total of $12,340
in the moderate stock and bond combination. The person
who had the riskier 70 percent allocation in stocks hadnít
regained as much. He had just $11,725.
of this might matter if the person has a steel stomach
and doesnít 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
canít stomach large losses, and consequently choose a
moderate allocation fund, thatís what they should get
ó not a more aggressive pretender.
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
thatís no reason for fund managers to take more risks
than usual in stocks.
bonds lose 5 or 10 percent, but thatís not exactly a
catastrophe," he said. "Only five years ago,
the S&P 500 lost 50 percent. And there are years
when stocks and bonds have losses together."
Ill., planner Sue Stevens suggests you ask: "Is
your fund company looking out for you or just trying to
make more money being in stock?"
the percentage is more than the 60 that a person
intended when selecting a moderate allocation fund
originally, she said, that person should look for
another fund ó perhaps another companyís moderate
fund. In a 401(k) with few choices, it might be a
"conservative" allocation fund or a fund with
a retirement date years before your planned retirement.