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Where to start with funds?
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May 13, 1998: 11:56 a.m. ET
Experts say some funds are better for new investors in extended bull market
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NEW YORK (CNNfn) - The Dow Jones industrial average is towering at record highs, and some new investors wonder if it's too late to climb aboard.
But Wall Street pros insist there are mutual funds that make sense for people getting started -- even in an aging bull market that may be headed for a fall.
"If someone has 10 or 20 years, daily fluctuations in the market don't matter at all," said Jason Kelly, author of "The Neatest Little Guide to Mutual Fund Investing." "There has never been a 20-year period where an investor would have lost money in the market."
Analysts have predicted a market correction for years, and anybody who heeded the warnings missed out on great returns, said Michelle Smith, managing director of the Mutual Fund Education Alliance, a non-profit organization of fund companies based in Kansas City, Mo.
"Many investors ask if the market is too high, or if it's too late to get in," Smith said. "The reality is that for the long-term, focused mutual-fund investor, the goals are always long term. 'Now' is always a good time to invest."
But Kelly acknowledged that many stocks are expensive these days. So a good choice for novice investors is to look at stock funds that focus on value rather than growth, he said.
Growth funds buy stock in hot companies with blossoming earnings and profits. But they're more volatile. By contrast, value-oriented funds invest in cheap stocks with low price-earnings ratios and high dividend yields.
(The P/E ratio is the stock price divided by the earnings per share. The lower the P/E ratio, the better the value. The dividend yield is the dividend, or shareholder payment, divided by the stock price).
"Value stock funds shy away from expensive stocks, so if the market bursts, these funds don't have as far to fall," Kelly said.
Some good choices include Barron Asset Fund (BARAX) and Oakmark Select Fund (OAKLX), Kelly said.
But even value funds may be risky enough to make a new investor quake. Another good bet are balanced funds, Kelly said.
Balanced funds invest in stocks and bonds and pay a dividend -- giving investors income as well as long-term growth.
"Balanced funds try to be the best of everything," Kelly said. He recommended Janus Balanced Fund (JAOSX) or Dodge & Cox Balanced Fund (DODBX).
Sheldon Jacobs, editor of the No-Load Fund Investor, warned that most balanced funds buy taxable bonds -- making them best for people in lower tax brackets and tax-protected IRAs.
"A balanced fund buys stocks and bonds, and when you put the two together it reduces volatility," Jacobs said.
Another option is to invest in an index fund that mirrors the performance of the S&P 500. Index funds don't have a fund manager making decisions -- and they invest in well-known companies that are good performers. Kelly said even in down markets, index funds typically beat funds that are actively managed.
"If you don't want to do any research, pick an index fund," Kelly said. He recommended Vanguard's Index Trust 500 Portfolio, (VFINX) which he called one of the oldest and best.
Of course, long-term investors don't really have to worry about being aggressive, Jacobs said. A person could lose 25 percent of his investment in an equity fund in a down market -- but bear markets generally only last about a year, he said.
"If you have a long-term horizon," Jacobs said, "you can ride out any bear market and invest in standard growth funds."
-- by staff writer Martine Costello
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