Then they got popular and succumbed to the law that everything corrodes. Fund managers split into separate camps-many of them narrowing their focus to single industries, countries, regions or investment styles. The mutual-fund count now exceeds the number of stocks on the New York Stock Exchange. You have more than 4,000 to pick from-including 871 in money markets, 1,447 in stocks (of many varieties) and 1,763 in bonds. Every customer niche seems to boast its own group of designer funds.
Such a universe no longer serves the investor who seeks a simple life. One choice is to abandon the field by paying an adviser to pick your funds. Alternatively, try the funds designed to make it easy again. Among them:
The index funds. These are constructed to mimic a special market index-for example, Standard & Poor’s index of 500 leading stocks. As investments, they’ll never do better than the market they follow; in fact, they’ll fall a little behind after deducting fund-management fees. On the other hand, they’ll never collapse when similar funds are going up. If you’re happy with any market’s long-term return, an index fund perfectly answers your need.
The original retail indexer is the no-load Vanguard Group in Valley Forge, Pa. (800-662-7447). It now offers 10 such funds, four of them born in the past 14 months.
But indexing, too, is getting cute. In the 1980s, Vanguard’s classic S&P 500 Index Trust outdid 70 percent of the other stock funds. Since 1990, however, it has dropped to the middle of the pack as the funds that invested in smaller companies sped ahead. Vanguard’s fast answer? Its year-old Total Stock Market fund, which tracks both larger and smaller stocks; or its Extended Market fund, a clone of the market for smaller stocks. Unfortunately, these funds carry a price. At Extended Market, new investors pay 1 percent upfront to cover the cost of buying new shares on their behalf. At Total Stock Market, it’s 0.25 percent. This protects the funds’ older investors by keeping their expenses low. To new buyers, however, it sure feels like a load.
The balanced funds. These split your money between stocks and bonds, a traditional investment style that appeals today to both the cautious and the bold. Twenty-eight such funds have been introduced in the past 12 months. The balancers lean toward 60 percent stocks and 40 percent bonds, which provides a surprising amount of safety. Assuming that all dividends were reinvested, and the 60/40 split between stocks and bonds restored at the start of every year, this combination wouldn’t have lost money in any five-year period since 1946, according to Ibbotson Associates in Chicago. Over all three-year periods, it lost money just twice.
The simplest buy is Vanguard’s Balanced Index Fund, introduced last September. Sixty percent of its money follows the Wilshire 5000 index of larger and smaller stocks; the remaining 40 percent follows the Lehman Brothers Aggregate Bond Index.
Other balanced-fund managers try to outgun the indexers with superior stock-picking or bond-market timing. Of the three top-performing no-loads over the past 12 months, both the CGM Mutual Fund in Boston (800-345-4048) and the Evergreen Foundation Fund in Purchase, N.Y. (800-235-0064), invest as much as 75 percent of their money in stocks. CGM hasn’t shown a loss since 1981. The Eclipse Balanced Fund in Peachtree City, Ga. (800-872-2710), stays pretty close to a 60/40 split, divided between undervalued big-company stocks and short-term bonds.
The asset-allocation funds. The better asset allocators spread your money over stocks, bonds and cash (represented by short-term instruments like commercial paper). They move incrementally from one investment to another, adding to the sectors that are doing the best. Long-term, however, they underperform the balanced funds because of the sum that they allocate to low-return cash.
On the lunatic fringe, a few allocators make major market-timing bets on gold shares, interest-rate futures and stock-market trends. Even though their gold bet recently paid off, their overall record has been poor. So read the prospectus before you buy. Multimarket funds vary a lot.
The standouts among the larger funds come from Fidelity in Boston (800-544-8888). It offers three high-performers, each one based on a different portfolio design. Fidelity Asset Manager takes as its benchmark 40 percent stocks, 40 percent bonds and 20 percent cash. Fidelity Asset Manager: Growth leans to 65 percent stocks; Fidelity Asset Manager: Income targets 20 percent stocks.
Supercautious investors might prefer to remain 100 percent invested in bonds. Yet they’re running more risk than they realize. The proof comes from Crandall, Pierce & Co., a financial-research firm in Libertyville, Ill. If you had owned nothing but long-term government securities, between 1946 and 1992 your average annual return would have come to 5.3 percent. In your worst year, your bonds’ market value would have dropped by 9.2 percent. By contrast, a mix of 70 percent bonds and 30 percent stocks (as measured by the S&P 500) paid 7.6 percent annually, with a worst one-year loss of only 6.1 percent. So adding some stocks should actually make you more secure.
Here are three other standard ways of allocating mutual-fund assets: (1) 100 percent stocks-for those who won’t touch the money for 15 or 20 years; (2) 70 percent stocks and 30 percent bonds-for growth investors who want to cushion their market risk; (3) 50 percent stocks, 50 percent bonds-a comfortable spread in late middle age.
The advisers. Many stockbrokers and financial planners will invest your money for you in a selection of no-load mutual funds. You pay two levels of fees. First, to the advisers-who charge anywhere from 0.5 to 2.5 percent of your assets annually. Second, to the mutual funds-which typically charge 0.2 to 2 percent for managing your money. A high-cost manager picking high-cost funds could cost you 3 to 4 percent year, which puts your investments on a treadmill to nowhere. Don’t pay any more than 1 to 1.5 percent, total. Better yet, pay zero and dial the 800 numbers yourself.
