10 Questions With Morningstar's Scott Cooley

Stock prices are back where they were three years ago, the average stock mutual fund fell almost 30% over the past year, and third-quarter fund statements will almost certainly be waffled with investors' tears.

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10 Questions With Morningstar's Scott Cooley

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For this week's 10 Questions, we mulled over the past year's losses and possible next steps with Scott Cooley, a senior analyst with Chicago fund-tracker Morningstar. A keen observer of the fund world, Cooley's penchant for pragmatic and articulate advice made him a natural to help us weigh our options, without getting too wrapped up in the market's recent drama.

Stocks have trailed bonds and even three-month certificates of deposit over the past three years. The third quarter, when every stock fund category lost ground, put an exclamation point on those losses. What returns should we expect from here? What should you do if you've got a tech-sick portfolio? Where are the smartest fund managers putting shareholder money? Read on.

1. Have you ever seen this kind of a downturn for funds? What do you think investors should make of it?

I don't think we've seen a decline of this magnitude over the past 20 years or so, certainly not a downturn that's lasted this long. I think people who invest in stocks need to keep in mind that what's important is where the market is 15 or 20 years from now when they need their money, not where it is today. In terms of shorter-term action, they need to think about whether their portfolios are balanced and diversified or if they've taken on more risk than they knew or intended.

2. What are some big funds that have struggled and others that have proved their mettle over the past 18 months?

Talking With: Scott Cooley Senior Fund Analyst, Morningstar

I think (FDEGX Quote)Fidelity Aggressive Growth [down 71% over the past 12 months] is the signature example of a fund that people may have considered as a core holding and [has] since imploded. I think people probably expected [aggressive fund shops such as] PBHG and Van Wagoner to get hit hard, but I'm not sure they expected a big Fidelity fund to fall as much as Aggressive Growth has.

On the flip side, I think the (AGTHX Quote)Growth Fund of America has performed very well. There are some big core funds where the managers were kind of catching some criticism in 1999 that have kind of held up well. Another one that comes to my mind is (FGRIX Quote)Fidelity Growth & Income. If you want to look at value fund managers, I'd point to David Dreman ((KDHAX Quote)Kemper Dreman High Return Equity) and the (OAKMX Quote)Oakmark fund [run by Bill Nygren].

Strong Bonds Bond funds are topping stocks over the past 90 days, 12 months and three years
Fund Category	Third Quarter*	1-Year Return	3-Year Return
Taxable Bond	0.8%	6.1%	4.1%
S&P 500	-17.9	-29.9	0
U.S. Stock	-18.2	-27.8	3
Foreign Stock	-20.1	-32.3	-0.3
Source: Morningstar. *Returns through Sept. 24.

3. With such weak stock returns, a lot of money is going into bond funds, money markets and bank savings accounts. What would you say to folks abandoning their stock funds?

If you're investing for the long haul, it's a mistake to be shifting money from stocks to money market funds right now. It doesn't make sense to be buying tech stocks with the Nasdaq at 5000 and selling them now that it's at 1500. The yields on money market funds are as bad as they've been for many years, and they're going to get worse probably in October [if the Federal Reserve lowers interest rates]. When I look at the market, I see many more attractively valued stocks than I've seen in a long time.

4. It's often said that when stocks are battered like they are today, smart fund managers can make their shareholders a lot of money. What are some of the boldest picks you've seen during this downturn? ...