Call To Diversification
As happy as mutual-fund investors may be to put Wall Street’s late-October tumult behind them, many advisers implore them not to forget it altogether.
The sudden drop in stock prices that culminated in a 554-point loss for the Dow Jones industrial average on Oct. 27 was quickly reversed in the days that followed, testifying to the calm and patience of the modern owner of stocks and fund shares.
But in the eyes of quite a few fund officials and market analysts, it could be a big mistake for anyone to view the recovery as simply a return to business as usual.
“This was clearly a wakeup call - a wakeup call to diversification,” says Stephen Treadway, chairman of the PIMCO Funds Distribution Co. in Stamford, Conn., which markets the funds in the $30 billion PIMCO family.
For most people, cautionary notes like these needn’t be taken as a signal to bail out of stocks altogether. The suggestion is to check your expectations to see if they can stand more cold-water dousings in the future, and to review whether your money is allocated in a way that serves your goals without exposing you to unnecessary risks.
This may mean “rebalancing” some money that is now in stocks or stock funds into something more stable, such as a bond fund, short-term money fund, certificate of deposit or similar interest-bearing investment.
Five years ago, the fund industry resembled a solid tripod with three roughly equal legs. Stock funds, bond funds and money funds each held a little more than $500 billion in assets.
By Sept. 30 of this year, stock funds had surged to nearly $2.4 trillion in assets, compared to about $1 trillion each in bond and money funds, leaving a structure that could be much more easily tipped over.
If your fund investments, including tax-favored retirement programs such as employer-sponsored 401(k) plans, have shifted in that same way, advisers urge you to consider whether it’s time to even things out somewhat.
Whatever you decide on that score, it may also be a good time to scale down your expectations about your stock investments, reminding yourself that the market’s steady rise in recent years has far exceeded historical norms.