Oct. 10--Q: I'm thinking of rolling my 401(k) from Fidelity into Vanguard funds. I have lost money, but I feel that my Vanguard funds have not lost as much as my Fidelity funds. Should I stay the course with Fidelity or do the rollover into Vanguard? M.K., Chicago
A: Beware concluding your loser mutual funds are indeed fit for the garbage heap.
They may be lousy funds.
But they might not be.
During periods like we've gone through -- with the stock market dropping and many mutual funds destroying savings by 10 percent or more -- individuals see money slipping away and figure they are holding a bad fund.
Their conclusion: Dump the garbage and go buy a winner.
But looks could be deceiving.
If, for example, your mutual fund invests in large U.S. stocks like Apple and Wal-Mart, you probably lost about 7.25 percent of your money last quarter.
But if your mutual fund invests in U.S. government bonds, your money probably grew about 3 percent last quarter.
So that's a clear choice, right? Not exactly.
The recommendation is to hold a variety of funds -- stocks and bonds -- even though the stock fund presented here looks like an idiotic choice.
Stocks and bonds run in cycles, sweet for a while, then unpleasant. Often, when stocks are cruel, bonds can be benevolent. Since it's hard to predict when the script will flip, you can historically count on stock funds to eventually grow more than bonds and bond funds to soften the blow when stocks go through a mean spell.
Consider how the stock market changed in less than a year. Over the last three months, the average fund investing in large U.S. stocks lost 7.25 percent, according to Lipper. But last year you might have adored the same fund as the average large U.S. stock fund gained 11.32 percent.
Within the market, sectors run through their cycles. For example, a fund investing in foreign countries probably lost about 11 percent last quarter.
So if you have two stock funds in your 401(k) -- a U.S. stock fund that lost 7 percent and an international fund that lost 11 percent -- the U.S. stock fund isn't better. There will come a time when international stocks will make more money than U.S. stocks. So you don't dump either based on their most recent performance.
How do you distinguish the truly good from the bad? Compare your fund to the average fund like it.
Remember, the average fund that invests in large U.S. stocks lost a bit more than 7 percent last quarter. If your fund lost that, you don't have a loser. If it lost 10 or 11 percent, maybe you do.
Examining three to five years is more reliable. You want mutual funds in the top half of all funds like it. If it's in the top quarter, even better. You can compare at Yahoo Finance and Morningstar.com.
An index fund is a good yardstick because it simply tells you what the stock market did. The Standard Poor's 500 index is an index to use for large company stocks and the Vanguard 500 Index fund simply mimics that index. If the fund in your 401(k) continually performs better than that index, you have a keeper. If it's worse, consider a change. For foreign stocks, the Vanguard Total International Stock index is a good comparison.
Index funds usually perform better than others because their fees are lower. That frequently gives many Vanguard funds -- but not all -- an edge over others. Vanguard index funds charge some of the lowest fees. The Vanguard 500 Index, for example, charges 0.18 percent, or $18 for a $10,000 investment. The average mutual fund charges 0.79 percent, or $79 for a $10,000 investment. The difference adds up over time.
gmarksjarvis@tribpub.com
