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Related topics: mutual funds, 401k, investments, retirement, savings

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.

Fidelity Freedom Income (FFFAX) is an interesting retirement fund. The problem is that no more than 20% can be invested in equities. While this may appear to be safe, it limits investors' upside. And as the average lifespan increases, the retirement savings that many baby boomers expect to see them through old age are falling short in many cases.

Funds that can take a toll
FundCategoryExpense ratio3-year return (annualized)
Vanguard Long-Term Treasury Admiral (VUSUX) Long government 0.1% 3.9%
Fidelity Freedom Income (FFFAX) Retirement income 0.0% 4.1%
Prudential Jennison Natural Resources (JNRRX) Natural resources 1.4% 3.6%
Calvert Income B (CBINX) Intermediate-term bond 2.1% 2.4%
Putnam Global Health Care A (PHSTX) Health 1.3% 4.2%

Prudential Jennison Natural Resources

For the past decade, commodities have been a tremendous investment. As investors continue to pour large sums into natural-resource mutual funds, more 401k plans are offering these options.

While it is a good idea to have exposure to hard assets, there should be some restraint. Commodities can be quite volatile. Also, they have been prone to long-term bear markets, as was the case from 1980 to 2000.

Prudential Jennison Natural Resources (JNRRX) has benefited from investor interest in commodities. The fund has $6.4 billion in assets and had a 34.7% return last year, in part due to its asset mix -- roughly half of the fund was invested in energy and the rest was in the mining sector. A good year, but the fund has certainly been a wild ride -- in 2008, it lost 53% of its value.

Calvert Income B

The expense ratio is a measure of what it costs an investment company to operate a mutual fund. On its face, a fund's expense ratio looks small. But if it reaches 2% or higher, it can eat into returns.

The impact is often the most significant for bond funds, which tend to have lower returns than equity funds.

Calvert Income B (CBINX) is an intermediate bond fund with an expense ratio of 2.1%. Over the past year, the fund returned 4.8%, but over the past three years, the average annual return was just 2.3%.

When you do the math, you see that returns on a high-expense fund like Calvert Income aren't as healthy as they should be, thanks to the fees.

Check your 401k funds to make sure you're not in one of these high-expense funds.

Putnam Global Health Care A

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Specialized funds are in another danger zone for investors. These instruments focus on a particular industry or country. The problem is that the volatility can be wrenching. It can be extremely difficult to time the ups and downs in these funds.

Putnam Global Health Care A (PHSTX) focuses on health companies with strong growth prospects.

Unfortunately, it has been mostly dead money for the past decade, earning an average annual return of only 1.7% over the period.