Lagging market may require adjustments

Wall Street is famous for its colorful expressions. “Fannie Mae,” for example, started as trader’s slang for the Federal National Mortgage Association. A “load” is a sales commission on a mutual fund. The “Spot market” is where you buy a dog. (OK, not really.)

Traders have many different words for this particular stock market, none of which are suitable for a family newspaper. If you’ve checked your balances recently, you may have used some of those terms yourself.

In markets such as this, the first question investors ask is, “Isn’t it time to fire my nitwit mutual fund manager and find someone else?” And, in fact, it may well be. There’s nothing wrong with upgrading your fund portfolio from time to time – provided the costs aren’t too high.

The problem with the current stock market is that nearly every large, diversified fund looks like it’s being run by lemurs. The 10 largest U.S. stock funds, which are most likely to appear in your 401(k) savings account, are down an average 6.9 percent this year.

It should be no surprise that most funds have fallen: The Standard & Poor’s 500 stock index has dropped 8 percent this year.

For example, the worst performer of the 10 largest, Dodge & Cox Stock, has fallen 11.2 percent. Dodge & Cox is a value fund, which means it tries to find beaten-up stocks that have the potential to stage a rebound.

Large-company value funds have fallen an average 9 percent this year. One reason they’ve lagged the S&P 500: Value funds traditionally favor financial stocks, which often sell for low prices relative to earnings. Unfortunately, financial services stocks have been clobbered by the meltdown in subprime mortgages. Dodge & Cox, however, has slightly fewer holdings in financials than the S&P 500 does. It does, however, have nearly 20 percent of its assets in health care stocks, vs. 11.7 percent for the S&P 500. The health care sector has been one of the market’s biggest laggards so far this year.

Bear in mind that the S&P 500 is a large-company stock index. If you own a midcap or small-cap fund, you should compare your fund with a similar index. The S&P 600, for example, measures small-company fund performance, and the S&P 400 measures midsize performance. You should also check your fund to see how it ranks among funds with similar objectives.