'Brutal' Losses Tarnish the Stock Fund Strategy

A drubbing isn't any less painful when it reaches historic proportions, as most fund investors can now tell you. Let's survey the situation and think about where to go from here.

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Even before the terrorist attacks on Sept. 11 sent battered stocks lower, this was already the worst year in recent memory for stock-fund investors. We've already pointed out that both bonds and three-month certificates of deposit are beating stocks over the past three years. Now let's get some perspective on the losses suffered by fund investors over the past 12 months:

• The average U.S. stock fund is down more than 25% after finishing only one of the past 10 years in the red -- a 1.1% dip in 1994.



• The average large-cap blend fund, a core holding in most portfolios, is down 31% -- the category's worst loss in more than 30 years.



• The $78.8 billion (FMAGX Quote)Fidelity Magellan fund, the nation's largest fund, has lost more than one-third of its value over the past year -- its worst fall since 1973.



• The average tech fund is down more than 70% over the same stretch after posting gains every year from 1985 through 1999.

The idea behind buying a stock mutual fund, rather than a stock, is that it gives you broad exposure to the market and a decent shot at its historical average of 11% annual gains without pegging your money to one company's fate. But the losses suffered over the past year by fund investors, even those who thought they'd dutifully diversified their portfolio, have been downright stocklike. So deep, in fact, that even investors who have been in funds for two, three or five years have been making less than 11% annually.

"It's been brutal," says Scott Cooley, a senior fund analyst with Chicago fund-tracker Morningstar. "Even when you look at five-year returns, there are only two in double digits and some that are very modest." ...