- The Washington Times - Sunday, August 15, 2004

There may be little cause for celebration in the stock market these days, but investors in value-focused mutual funds have reason to feel the tiniest bit smug — if only because they have lost less than the folks who stuck with growth.

It’s not easy to be philosophical about losing money, but putting your losses in perspective might help you feel better. July was a dismal month for mutual funds all around, with domestic equity funds falling an average of 4.9 percent, according to Standard & Poor’s, a provider of independent investment research, ratings and indexes. Small-cap growth funds suffered the worst, plunging 8.9 percent, while large-cap value held up the best, shedding only 2.5 percent.

The average equity fund has fallen 1.2 percent so far this year. But value stocks, which tend to be in more established and dependable market segments, have enjoyed an edge over other investment styles. Although small- and midcap value equity funds have been 2004’s leaders so far, cautious investors are gravitating toward less volatile large-cap value funds, where the ameliorating effects of dividends may offset the bruising many believe is still to come.

“Preservation is on the minds of everyone we talk to now,” said Percy E. Bolton, a fee-only financial planner in Pasadena, Calif. “Growth stocks and small-cap stocks are extremely volatile, so what you’re telling your client if you put them in that position is, ‘The pain may be extreme … can you take it?’ And most of them are saying no.”

There is already a great deal of pessimism in the market, which has been weighed down by climbing oil prices and anxieties about inflation, interest rates, terrorism and the upcoming elections.

On top of that, the third quarter is typically a rough time, said Sam Stovall, S&P;’s chief investment strategist.

So the situation isn’t pretty. But market analysts say it would be a mistake to sell off your equity funds now, especially if you are dollar cost averaging — adding to your investment on a regular basis regardless of where the market goes. By keeping up your strategy through this lull, you will wind up buying shares at lower prices. If you feel you must do something to protect your portfolio, leaning toward value is a safe tactic.

“Value stocks have a higher dividend payout, less volatility and a lower valuation,” said Mr. Stovall. “So, they’re cheaper, they pay you more and they wiggle less. If you can rotate, if you have the ability in your retirement account, in your 401(k), to embrace higher dividend-paying, higher-quality stocks, then now might be the time to be doing that.”

Large-cap value funds may not be the most exciting investment, but their returns are steady — actually equal to growth over the long haul. And their dividend yields can be an important source of income in down markets. For a risk-averse investor who may still be smarting from the losses that followed the tech bubble and the September 11, 2001, terrorist attacks, that sounds pretty appealing, Mr. Bolton said.

Mr. Bolton also advised against lowering your contribution to your investment during bad times, because you never know when the next upward move will come. Many people who left the market after being burned in the last downturn missed the stellar gains of 2003, which might have replaced much of what they had lost.


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