Dear George: I just received my 401(k) statement for the first quarter and, for the first time in a long time, the balance went down. Is this a good time to make some serious allocation adjustments?
, Lynn, Carlsbad
Dear Lynn: Welcome to the real world of investing. Despite common belief, stocks and stock mutual funds actually do go down in price once in a while. Sometimes a tough quarter can lead people to make changes in the asset allocation formula that they use in their retirement accounts. Often that sabotages a productive long-term strategy. However, it is only human nature to react to short-term conditions.
When investors go through a gut check like we are now, it provides an opportunity to rethink the way that their money is invested. That means a review of the different investment categories and investment options in each area.
For instance, a person with 20 or more years to go before retirement should probably stay with a plan in the 401(k) or other retirement program that invests exclusively in growth stock mutual funds. In that circumstance it is more important to make sure that you are not overweighed in any one particular market sector.
The surge in technology and Internet stocks , despite the recent correction , may have made that sector too dominant in your plan. What started out as 10 percent of your assets could have grown to more than half.
What makes realignment of a retirement plan portfolio painless is the fact that you are not penalized with any taxes when you move the money around. All gains and income are sheltered until you begin to withdraw the money from the plan.
The real trick for retirement investors is to figure out what sectors will meet your investment objectives. Most mutual fund families have online calculators that will help you develop an appropriate formula. Check out the Web sites for Strong Funds (www.strong-funds.com) and T. Rowe Price (www.troweprice.com) and use their tools to come up with a workable plan for your retirement funds.
Dear George: I recently attempted to invest in the Fidelity Magellan Mutual Fund only to find out that it is closed to new investors. Why would a fund reject new money?
, Tim, San Diego
Dear Tim: The growth in the mutual fund industry has been staggering. More than $7 trillion is now invested in stock, bond and money market mutual funds. Having that much money to manage can be a dual-edged sword. Obviously, the more money a company manages, the more they will collect in fees and expenses. However, managing a large stock market portfolio can be a real nightmare.
The Fidelity Magellan Fund is a classic example. The fund has grown to more than $100 billion in assets. Imagine the difficulty in trying to make investment decisions without causing shock waves in the marketplace. If the manager wants to put 5 percent of the assets into a particular stock, that means investing $5 billion. That can often represent a sizable percentage of the total market value of many companies.
Peter Lynch, the former manager of the Magellan Fund, says one of the reasons he stepped down from the position was the fact that it was just too hard to manage the money without causing disruptions in the market both when he would buy or sell a stock.
If a particular fund is closed to new investors it is not uncommon for the company to create a clone fund with the same investment philosophy and a similar portfolio. Just ask the fund representatives to identify which fund in the family is the closest to the fund you want to buy.
Chamberlin is the host of “Money in the Morning,” heard weekdays from 9 a.m. to noon on Ksdo.com A/M 1130. Send to P.O. Box 1969, Carlsbad, CA 92018, or E-mail him at (george@moneyinthemorning.com).
