Another 'Safe Haven' Hits the Skids

Aging baby boomers must be gagging on their organic bran flakes.

For years they've been sold "equity income" mutual funds on the grounds that these will give them a nice steady income stream for their retirement.

The reality? Some of these supposedly low-risk funds have been among the hardest hit in this summer's market meltdown.

Most investors may not realize it, but these funds are loaded up to the gunwales with financial stocks, from mortgage brokers to retail banks.

Even before yesterday's turmoil, leading funds like Vanguard (VEIPX Quote)Equity Income (VEIPX) and T. Rowe Price (PRFDX Quote)Equity Income (PRFDX) had already slumped 9% from their July 19 peak, and others were doing even worse. Fidelity (FEQIX Quote)Equity Income (FEQIX) was down 10%, while RiverSource (INDZX Quote)Diversfied Equity Income (INDZX) and Eaton Vance (EDIAX Quote)Dividend Income (EDIAX) about 11% each.

Even American Funds' giant (CAIBX Quote)Capital Income Builder (CAIBX), which should be doubly stable because it invests in bonds as well as dividend-paying stocks, is off more than 7%.

In many cases, the selloff has wiped out most, or all, of this year's gains completely.

It's hard to blame the managers for picking the wrong "income" stocks. Index funds that track the sector overall are doing just as badly or worse. The Dow Jones Select Dividend Index iShare (DVY Quote), a great proxy for the equity income class overall, is down 11% so far from its July 19 peak. It's now in the red for 2007.