Your stock funds are breaking new ground -- by falling through the floor.
Mutual fund companies are mailing out millions of dreary third-quarter account statements this week. Take a deep breath before you tear yours open because you might be profoundly disappointed, if not shocked, by what you find inside. Thanks to the potent combination of thin-air valuations, a sagging economy and the terrorist attacks on Sept. 11, stock funds have suffered declines steeper than any in recent memory.
As part of this week's special Statement Shock report, let's survey the past year's brutal losses, try to put them in some historical perspective and then figure out what we can do to weatherproof our portfolios.
Saying the past year has been tough for stock-fund owners is like saying John Tesh's music isn't that bad. There are 18 U.S. stock-fund categories, according to Chicago fund tracker Morningstar. Fifteen of them are under water over the past 12 months.
The average U.S. stock fund is down a whopping 22% over that stretch, which is in line with the
S&P 500's 24% fall. For a little perspective, that almost triples the S&P 500's worst calendar-year loss in the past 25 years -- its 9.1% dip last year. Foreign stock funds, down 28% on average over the past 12 months, have fallen even harder, while bond funds have quietly and dutifully chugged north amid equities' maelstrom.
Off the Charts
Many sectors hit hard |
| Fund Category |
One-Year Return |
Three-Year Return |
| Municipal Bond |
10% |
3.9% |
| Taxable Bond |
6.7 |
4.5 |
| U.S. Stock |
-22 |
9.1 |
| Foreign Stock |
-28.1 |
4 |
| Source: Morningstar. Returns through Oct. 8. |
While a broad range of stock funds are in the red, those that rode big tech and telecom bets to big gains in 1999 and huge sales in 2000 were hit hardest. Sector funds gobbled up more than 30% of the record $309 billion that flowed into stock funds last year with tech funds getting most of that money. Unfortunately, and perhaps predictably, that money showed up just in time for the
Nasdaq's siren song to stop.
The combination of rich valuations and sagging tech budgets has tech titans like networker
Cisco (CSCO Quote - Cramer on CSCO - Stock Picks) and server king
Sun Microsystems (SUNW Quote - Cramer on SUNW - Stock Picks) down more than 70% over the past year. The average tech fund is down a jaw-dropping 65%, and communications funds, which have a third of their money in tech stocks, have lost more than half their value since this time last year.
Unless things perk up in the fourth quarter, the tech, communications, health care and utilities fund categories are each on track to notch their worst calendar-year losses since 1980, according to Morningstar.
Record-Setting
Worst year in memory across the board |
| Sector-Fund Category |
One-Year Return |
Worst Year Since 1970 |
| Real Estate |
8.7 |
-16 (1998) |
| Financial |
-3.3 |
-15.9 (1990) |
| Utilities |
-18.1 |
-8.7 (1987) |
| Natural Resources |
-11.3 |
-25.3 (1998) |
| Health |
-18.2 |
-4.7 (1992) |
| Communications |
-53.5 |
-32.3 (2000) |
| Technology |
-64.5 |
-32.2 (2000) |
| Source: Morningstar. Returns through Oct. 8. |
A similar theme is playing out among diversified funds, where tech-stuffed growth funds have fallen harder than their bargain-hunting and tech-light value peers. The average large-cap growth fund, for instance, is down about 40% over the past 12 months. That's far worse than the category's worst calendar year since 1980, a 16% fall last year. The past year's losses for mid-cap growth funds (-39.9%) and small-cap growth funds (-29%) also are threatening to set records for calendar-year tumbles since 1980.
Value funds have seen their sales rise with performance, but they haven't necessarily set the world on fire either. Small-cap value funds are the second-best performing category, with an 8.5% average gain that only narrowly trails real estate funds. But big-cap value funds' 8% fall since this time last year would be that category's worst calendar-year performance in more than 20 years if things don't look up soon.
You Get the Picture
Right. Making the same point as above |
| Fund Category |
One-Year Return |
Worst Year Since 1980 |
| Large-Cap Value |
-8.1 |
-6.3 (1990) |
| Large-Cap Growth |
-39.9 |
-15.9 (2000) |
| Mid-Cap Value |
2.8 |
-8.6 (1990) |
| Mid-Cap Growth |
-39.9 |
-7.8 (1984) |
| Small-Cap Value |
8.5 |
-13.4 (1990) |
| Small-Cap Growth |
-29 |
-8.7 (1984) |
| S&P 500 |
-23.7 |
-9.1 (2000) |
| Source: Morningstar. Returns through Oct. 8. |
While these numbers are bleak, nothing brings the reality of these losses home like dollar figures. Last year, some $37 billion flowed into a handful of tech-heavy growth funds that topped 2000's sales charts:
(FDGRX Quote - Cramer on FDGRX - Stock Picks)Fidelity Growth Company,
(AGTHX Quote - Cramer on AGTHX - Stock Picks)Growth Fund of America,
(JAWWX Quote - Cramer on JAWWX - Stock Picks)Janus Worldwide,
(FDEGX Quote - Cramer on FDEGX - Stock Picks)Fidelity Aggressive Growth and
(ACEGX Quote - Cramer on ACEGX - Stock Picks)Van Kampen Emerging Growth.
On average, a $10,000 investment in these funds at the start of last year would be worth less than $6,300. Because funds are usually designed to give you access to the stock market with less risk, it's hard to imagine investors in those bestsellers thought their dollars could morph into 63 cents.
OK, that's enough doom and gloom.
The bottom line is that growth-heavy investors paid a steep price for their avarice in the wake of the Nasdaq's bonny run in 1999, when the average tech fund rocketed up 137%. But it wasn't as bad for folks who dutifully spread their money among bond funds and tech-light value funds, as well as high-octane growth and tech fare.
If you're in this camp, congrats. If not, we've pulled together a
blueprint of a diversified portfolio, linking to our most recent screens for each category's brightest stars. We've also built a couple of model portfolios -- a low-maintenance option and one for, well, fund junkies. Each shows how a diversified approach would've saved you some consternation, pride and money.
If you want to learn more about why and how you should diversify your portfolio, check out these stories that make the case for
bonds, foreign funds, and both
value and growth funds. You can't turn back the clock and undo last year's errors, but you can act now to avoid them next time.
Ian McDonald
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