A tough year for the markets is good reason for fund diversification

NEW YORK -- Portfolio diversification might sound boring or stodgy, but investment advisers say it's the approach mutual fund investors should take these days.

Consider, they say, that neither the investors who focused on high- flying technology funds nor those who stuck to safer stock index funds are happy this year. Both groups would have been better off, experts say, investing in a "basket" of funds with varying growth strategies and that invest in companies of all sizes and in different industries.

Technology fund investors, of course, have the most reason to despair this year. The Nasdaq Composite index is down about 30 percent for 2000.

Likewise, tech funds are down about 30 percent so far this year, according to Lipper, a Summit, N.J.,-based company that tracks fund performance.

Index funds -- most of which tie their performance to that of the broader Standard & Poor's 500 index -- are doing better but still trading at a loss for the year. The S&P 500 is down about 10 percent after delivering gains in the 20 percent to 30 percent range for the last five years.

The biggest mutual fund, Vanguard's $105 billion 500 index fund, has fallen about 10 percent so far in 2000.

"The name of the game is diversification," said Vernon Lee, an independent financial planner and head of Lee Investment Consulting in Raleigh, N.C.

Diversification is not a new concept. Financial advisers have advocated it for decades.

Lee said diversification these days means buying funds that invest in large and small companies both domestically and across the globe and with varying growth strategies and across market sectors. It doesn't mean buying several index funds or several funds in the same sector, because those funds likely invest in the same handful of stocks.

Although it might be tempting to get into the current hot sector- specific mutual funds, Lee doesn't recommend that approach. Right now, the top-performing funds are biotechnology and health care- related, up 36 percent for the year, according to Lipper.

Lee reasons that an individual sector can have one really good year followed by a real downer. He sees one big exception: technology funds.

Investors shouldn't bail on technology-specific funds, he said, despite the fact that they're down about 30 percent so far this year. Advisers and equity analysts generally believe tech stocks will turn around given Americans' dependence on cell phones, e-mail and the Internet.

This year "seems like a never-ending fall to the tech sector. But probably now is the worst time to get out of the tech sector," Lee said.

"Technology in the long-term is still a good place to be. People have got to realize this is the first year in about a decade that technology funds have shown a loss."

Lee advises moderation and recommends mutual fund investors copy the S&P 500 in divvying up their investments, which means about 30 percent of their fund portfolios should be in tech-specific funds.

The remainder should go into broader index funds and in defensive positions, such as financial and health-related funds that tend to do well in bearish markets or during an economic slowdown.

"With the market being down, there's no place to hide," Lee said.

Another adviser suggests giving greater consideration to index funds, to avoid the costly fees associated with managed funds that invest in specific sectors or that try to beat stock indexes like the S&P.

"In the long run, the index funds will outperform managed funds," said Ralph Scearce, a personal financial adviser and head of Cambridge Financial in Lexington, Ky.

Scearce defended index funds against the contrarian viewpoint that those who invest in them are settling for mediocre or poor returns when the market flounders.

This year, Scearce said, simply investors have to lower their expectations, if they haven't already. He reasonsed that annual returns of 20 percent in the S&P and Dow Jones industrial average can't be sustained year after year.

"That's an exorbitant high return," Scearce said. But "over the long term, the S&P has averaged somewhere in the neighborhood of 10 to 12 percent.

"That's where I put my few pennies and that's where I recommend my clients put their money."

2000Copyright
Provided by ProQuest Information and Learning Company. All rights Reserved.