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Planning for the New Year



With 2003 in front of us, make sure you've got your ducks in a row---and things like investment return expectations and asset allocation in check---if you plan on being a long-term mutual fund investor.

Some of the many things that the past three-year down market has shown investors is that investing isn't for everyone. And, that there's plenty of volatility on Wall Street whether youâre a stock or a bond investor.

Shaken fund investors have taken about $100 billion out of stock mutual funds from January through mid-December, according to the Wall Street Journal. And, based on the cumulative fall of the Wilshire 5000 index, the market is out $7.2 trillion since it first began to fall in early 2000. At a 9 percent average annual rate of return, with dividends reinvested, it will take until 2009 for the market to regain all of that loss.

On the other hand, bonds had quite a dandy year. Through mid-December, the average domestic long-term fixed-income fund was up over five percent, according to Lipper. World income funds scored even higher; the average fund in that category was up over 10 percent.

Looking ahead, whether youâre a new or a seasoned fund investor, it's going to be a well diversified asset allocation plan, and some realistic fund performance return expectations, that will make the difference between those who stay invested and those who leave Wall Street behind.

To help guide you with your long-term investing plan, consider the following:

Stock returns. The folks from Ibbotson, the well-respected Chicago-based securities research firm, expect the average annual return on stocks to be about 8 percent going forward for the next decade or so.Use that as a benchmark for the returns you expect from the equity portion of your mutual fund portfolio.

Bond returns. Interest rates are at lows not seen in decades with, in cases like savings account or money market returns, precious little room to fall lower. So, while bond funds have had a great run, chasing bond fund returns could be disappointing. Adding them to a portfolio to round out your asset allocation plan, on the other hand, can make good sense.

Gold funds and other bear market funds. Gold funds rewarded their shareholders handsomely in 2002. The average fund returned over 56 percent to its investors as of mid-December, according to Lipper. And, over the past five years their average annual return of was north of nine percent. The pros suggest placing between five and 15-percent of your total assets in gold funds and/ or other types bear market investment strategy funds. Past performance shows how small allocations like that may pay off.

Asset Allocation. A group of fee-only investment advisors, all members of the Zero Alpha Group, have come up with a handful of the biggest asset allocation mistakes that investors make. Here are a few of them:

  • Not rebalancing your portfolio because of fear. The bear market has made many an investor afraid to open the monthly statements their broker or fund family sends. Instead of being afraid to open those statements, ask yourself : Does the reason I bought this investment product still exit and make sense? The answer you get will help with your '03 asset allocation plan.

  • Failing to take advantage of some simple investment strategies to reduce taxes. Losses can offset gains in the investment arena, so don't be afraid to take them.

    "An investment's true worth is always what it can be sold for today, " says Brent Brodeski, of Savant Capital in Rockford, IL. " Accepting this allows investors to aggressively harvest tax losses to offset other current gains."

  • An over simplistic understanding of what "asset allocation" means. "Asset allocation in today's markets does not mean just owning a certain percentage of stocks and certain percentage of bonds, "says John Prizer, of Resource Consulting in Orlando, FL. "To minimize risk and maximize the potential for returns, you have to take a much more sophisticated view."

That means, investors need to diversify within the various asset classes.

Bottom line, may 2003 be both a prosperous and peace-filled year for all.

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Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.


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