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Believe Buffett? Consider These Funds

Warren Buffett and plenty of other money managers say you should buy stocks now.

If you agree, which funds should you take? Investors with a taste for risk might consider momentum funds. These can skyrocket when markets climb.

Momentum funds typically buy stocks with rising share prices or improving earnings. The funds soared in the 1990s bull market and collapsed when stocks tumbled earlier this decade. That tarnished the reputation of momentum investing. But many of the funds are sound choices. The problem is that shareholders tend to buy them at the wrong times, piling in at market peaks and selling at troughs.

Consider Turner Midcap Growth (TMGFX), which typically buys stocks with increasing prices and annual earnings growth of more than 20%. Long-term shareholders have good reason to be satisfied with their fund. During the 10 years ending in September, Turner returned 8.4% annually, more than 5 percentage points ahead of the S&P 500.

Unfortunately, few investors stayed with Turner for the whole decade. The fund had only $35 million in assets in 1998. The next year, it returned 125.5%, and investors poured in. By 2000, assets had grown to $937 million. New investors arrived just as the market began to fall. Faced with losses, many shareholders bailed out, and assets slipped to $509 million in 2002. Those who departed missed the recovery, which occurred in 2003, when Turner returned 49.6% and outpaced the S&P 500 by more than 20 percentage points.

Based on that history, the time to buy Turner and other momentum funds is when the outlook is bleak. By jumping in during a downturn and holding patiently, investors stand a good chance of outdoing the market in future years.

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