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There’s
no other way to say this.
If
you are about to open the mail you’ve just received
from your 401(k), college fund or broker, you are
probably going to be disgusted with what you see. The
last couple of months in the stock market were awful, so
any mutual fund with stocks in it will look horrible for
the third quarter of this year. That’s the three-month
period that ended Sept. 30.
If
your stock mutual fund is like the average, you probably
lost about 17 percent of the money you had in it when
the quarter started in July, according to Lipper, a firm
that tracks how funds perform.
And
your losses might be even worse than 17 percent. If you
have a mutual fund that invests in small companies, you
probably lost more than 21 percent. If you have an
international fund that invests in companies around the
world, you are probably down more than 20 percent.
And
if you were among the people who got excited about
tremendous growth in areas like China, Brazil and India,
you are probably going to wonder why people think those
areas are so hot. Emerging market funds that invest in
China or Latin America destroyed more than 25 percent of
the money people had in them.
If
it’s any consolation, you should know that as of now,
your losses probably aren’t quite as bad as they look
on paper. After the end of the third quarter, the Dow
Jones industrial average climbed about 8 percent into
the first couple of weeks of October. The recent gain in
the stock market didn’t erase your losses entirely,
but it helped. Now you might be down about 10 percent.
But at least the reprieve demonstrated a critical point
— that stocks don’t stay down forever and that
losses do ease with time.
Whether
that time is now is not clear. Some analysts think we
are in a bear market. That’s a period of about six
months or more when stocks fall 20 percent or more and
leave people wondering when the pain will end. If we are
in a bear market, stocks could be on their way to about
a 30 percent decline.
That’s
the average decline when there is a recession, and some
analysts think we could be dipping back into one. On
average, when there is no recession, stocks drop about
26.9 percent in bear markets, according to the Leuthold
Group. The good news is that if we are in that type of
market, a lot of the damage has already been done. And
on average when the stock market goes through a bear
market, it is back to even about 2.3 years later.
That’s
one reason young investors are told to stay with a blend
of stock and bond funds through good times and bad.
Since you don’t know when the pain will end, holding
on gives you the chance to ride the recovery when it
ultimately appears.
People
close to retirement or in retirement need to be more
careful, because a long bear market can destroy money
when retirees don’t have time to recover.
But
the last quarter demonstrates that people in or near
retirement can hurt themselves if they assume their only
risk comes from the stock market. The growing threat of
a recession and Europe’s financial troubles brutalized
some bond investors too.
If
you have money in a high-yield bond fund and it behaved
like the average fund in that category, you lost about 6
percent of your money last quarter. That might be a
shock if you moved money out of stocks and into bonds to
protect it. High-yield bonds are no place for money you
intend to keep completely safe. They are risky because
high-yield bonds are issued by companies or governments
in shaky financial condition.
In
a recession, a shaky company can end up in bankruptcy
and fail to pay back bond investors. Consequently, when
the economy looks vulnerable, bond investors dump junk
bonds. If you have a lot of high-yield bonds in your
bond fund, you will suffer a loss.
So
be aware of what’s in your bond fund. A small dose of
high-yield bonds on an ongoing basis can make sense. But
in the past few months, too many investors worried that
CDs and safe government bonds were paying too little
interest. They moved an excessive amount of money into
risky bond funds with oversize portions of high-yield
bonds in them.
If
your bond fund suffered a sharp loss during the last
quarter, you will want to ask yourself if you have been
taking on more risk than you intend to be taking.
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