From March 2009 – when the stock market hit bottom during the financial crisis – through December 2012, investors withdrew almost $400 billion more from equity mutual funds than they added to them. During the same period, the S&P 500 gained more than 100 percent, leaving many frustrated investors in its wake.
The flight from stocks during the depths of the recession was not surprising, but 2012 saw the biggest migration from stock funds during the last five years. Yet the average equity fund, with reinvestment of dividends, gained 14.6 percent in 2012. Of course, past performance does not guarantee future results.
The tide seems to be turning in 2013, with net investment of almost $20 billion in domestic equity funds during the first two months. Perhaps it's a good time to examine the role of stocks or stock funds in your portfolio.
Not all equities are created equal
A conservative investment strategy may be appropriate if you are retired or nearing retirement, but avoiding stocks altogether could prevent your portfolio from keeping pace with inflation or offering the growth potential you may need. Equity mutual funds offer a wide variety of choices that could help you balance risk and reward. Here are five basic categories to consider, in ascending order of typical risk.
• Balanced funds mix stocks and bonds and generally seek to conserve investor principal, pay current income, and pursue long-term growth of principal and income.
• Equity income funds seek a high level of income by investing primarily in stocks of companies that consistently pay high dividends. Growth is a secondary objective. The amount of a company's dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed.
• Growth and income funds seek to combine long-term capital growth and current income. These funds strive to invest in the stocks of companies that have experienced increased share values and a solid dividend-paying record.
• Growth funds seek capital growth by investing in the stocks of well-established companies, typically without considering dividend income as a significant factor. The potential for greater reward comes with a greater degree of investment risk.
• Aggressive growth funds seek maximum capital growth by investing primarily in small- and mid-cap stocks. The prices of small-cap and mid-cap company stocks are generally more volatile than large company stocks, so the risk is greater than in funds emphasizing larger companies.
Many types of funds in each of these categories might be used to attain the desired balance for your portfolio. Of course, all mutual funds entail risk, and there is no guarantee that a fund will achieve its stated objective. The return and principal value of mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
(Charles Sims Jr. is president/ CEO of The Sims Financial Group. Contact him at 901-682-2410 or visit www.SimsFinancialGroup.com.)