Weathering the Storm

06/16/2006 12:00 am EST

Focus:

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of No Load Fund Xthe top performing fund newsletter advisor for the past 20 yearsoffers her advice to help investors "weather the storm." Here, she looks at some income ideas as well as some conservative, core stock funds.

"Despite the short-term reversal, most highly ranked funds remained so because their longer-term performance still strongly outperformed that of their peers. Remember that the FundX Score has a built in lag because it includes the trailing three-, six-, and 12-month returns. This lag is purposeful and serves to keep us aligned with confirmed market leadership, not blips in the market.

"It’s the larger trends that matter. And remember, two steps forward, one step back is normal market action. Stock market corrections are an inevitable part of investing. We’ve sailed through corrections in each of the past two springs. From early April to mid-May 2004 the S&P 500 dropped 6% then gained 13% the rest of the year. Last spring the S&P 500 fell 7% then gained 11% in the balance of 2005.

"No one can predict consistently when market declines will happen nor how long they will last. All we know is that they end. And looking at broad market experience is of questionable value to Upgraders because our discipline migrates us to areas of the market with the best relative returns. There are always some funds bringing in good relative returns. Nevertheless, the current decline may be easier to live with knowing it is expected and routine.

"A look back at stock market history shows that declines of 5% or more have occurred about three times a year and lasted an average of 1-1/2 months. Moderate declines of around 10% occur about once a year and typically last an average of three or four months. At the extreme end of the scale, bear marketswhen stocks fall 20% or more have happened about every 3-1/2 years and have lasted about a year on average. History also shows that long-term investors have come out ahead.

"Our goal with this advice is to help you weather the storm. Equity investing can sometimes be a hair-raising roller coaster ride. As investors, we may believe firmly that equity funds hold out the best prospects for high long-term returns. But ‘keeping the faith’ can be rough at times, especially after a month like we experienced in May. It may be a good time to re-evaluate your equity/fixed income mix to be sure you portfolio is properly allocated to meet your needs. After all, the "right" portfolio should help you weather the market’s volatility.

"The two most important things to consider when determining what mix is right for you are your investment time horizon and your tolerance for risk. Your time horizon is simply when you’ll need the money; risk tolerance is another way of saying, ‘How do you sleep at night when the market appears to be in a tailspin?’ A balanced portfolio may help you to better cope with regular market corrections.

"Our approach to fund investing is based on an 'Upgrading' startegy, in which we move into those funds that have been the top performers over the previous three-, six-, and 12-month periods. For those with different time and risk horizons, we break funds into several category, from speculative to conservative. We recommend that most long term investors use our ‘category 3’ funds as the core of a portfolio: Here are the top ten fundsincluding both mutual funds and exchange traded funds from that group:

Oakmark International (OAKIX)
Wright International BlueChip (WIBCX)

SSgA International Stock Select (SSAIX)

Vanguard Inernational Value (VTRIX)

Harbor International Inst (HAINX)

iShares MSCI EAFE (EFA
ASE)
Vanguard European Index VIPER (VGK ASE)
Laudus International Market Masters (SWOIX)
iShares S&P Euro 350 (IEV ASE)
StreetTracks DJ Euro STOXX (FEZ NYSE)

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