2/22/2011 12:42 PM ET|
5 funds that could kill your nest egg
It's a long climb back if your portfolio takes a tumble, so pick your funds carefully. Here are some that are just wrong for the average investor.
Even with professional management, mutual funds can be risky. A 401k portfolio can be sent reeling if a faulty investing strategy is employed, a portfolio is too tightly concentrated or the wrong funds are picked.
And recovery from a misstep is more difficult than many investors imagine. If your fund declines by 30%, for instance, you'll need a gain of 42.9% just to become whole. If you fund sinks by 40%, a gain of 66.7% is required to catch up; lose 60% and you'll need a recovery of 150%.
This is why mitigating losses is just as important as picking winners.
Here are five mutual funds to avoid:
Vanguard Long-Term Treasury Admiral
Bond funds seem fairly safe, especially when they are chock-full of government securities. What could go wrong?
Well, the bond market has been in a bull phase for more than three decades. In other words, it seems reasonable that there may be a reversal. Moreover, interest rates have been at historic lows but are starting to get volatile.
To top it off, if inflation seeps back into the U.S. economy, prices on government bonds will suffer. The impact will be hardest on longer-term securities and related mutual funds.
Investors need to be wary of funds like Vanguard Long-Term Treasury Admiral (VUSUX). True, the fund has a competitive expense ratio of 0.12% and a good management team. But this will mean little if there is a sustained increase in interest rates.
Keep in mind that the fund has an average maturity of about 13 years. This means that a 1% increase in rates will reduce the portfolio by a whopping 13%.
High interest rates wreaked havoc on bond funds throughout much of the 1970s. Protect yourself and dump Vanguard Long-Term Treasury Admiral before you get burned.
Fidelity Freedom Income
Retirement planning is complex and requires periodic changes in an investor's asset allocation. To help things out, some mutual fund managers have launched so-called "retirement" funds that handle the details for you.
But be wary. These funds can often be costly and too cautious. The result could be that you fail to reach your retirement goals.
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"Keep in mind that the fund has an average maturity of about 13 years. This means that a 1% increase in rates will reduce the portfolio by a whopping 13%." That is true if DURATION is 13, not MATURITY.
If writer got that wrong, what else is wrong in the article??
The fund has returns of 19% for 10 years. Why would you avoid it? Nobody said you had to put all your money in your 401k into this fund. Put 20% of your money in it and the other 80% in other funds. The fund is not diversified, but that doesn't mean that you can't diversify your 401k by puttine 20% of your money in this fund and 80% of your money in other funds in your 401K.
Also, haven't stock funds had long bear markets and one year drops almost as big as this fund. Stocks lost 90% of their value from 1929-1932. Stocks averages didn't go anywhere from 1966 to 1982 and lost a lot of money when adjusted for inflation. The nasdaq index was 5000 in 2000 and has not come close to getting back to even in over 10 years. Bond fund were terrible during the 1970's. and there is good chance they could be terrible for the next ten years. Commodities are priced in dollars. What has changed that gives you any indication that the dollar won't continue to lose value and commodities gain in price as demand is increased by governments around the world as currencies lose value.
'Someone' writes: "The fund has returns of 19% for 10 years...."
I think he/she meant to say: "The fund has HAD returns of 19% for 10 years."
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