Fund strategies for the future

When New York finally reopened on Sept. 17, it set off a wave of selling that drove the markets down to their lowest levels in years.

Our lead article in this issue offers some specific recommendations for action to be taken now and funds that are best positioned for the current crisis situation. But here are some general thoughts that you may want to keep in mind in formulating your personal strategy.

1) The worst of the market drop is probably over. That doesn’t mean you should do nothing. But it does mean that you should not sell all your equity funds at this point and sit in cash. The markets will eventually recover and you will want to be part of that.

2) Interest rates have been slashed and may be cut even further depending on what happens to the economy. But short-term rates have been affected much more than long-term ones. Once the economy stabilizes, the rate cutting will end and long-term rates are likely to edge higher. That would have a negative effect on funds that specialize in long-term bonds. To keep your fixed-income risk at a minimum, overweight towards short-term bond funds and mortgage funds. The returns will be low but so will the risk/P>

3) Keep your perspective. If you have suffered major financial losses, as many have, you may feel discouraged and depressed. It’s normal. But we have had market crashes before, many times in our history. No matter how bad they have seemed at the moment, looking back they have only been blips in the long upward trend of stocks. Some people are saying: “This time it’s different.” In some ways it is, especially politically and militarily. But as far as financial markets are concerned, I doubt it. They will recover, and there will be opportunities to regain those losses and more.

From the October 2001 edition of Mutual Funds Update, a monthly newsletter edited and published by Gordon Pape. For subscription information