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Should I bail out of my stock fund?

What are institutional shares?

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Should I bail out of my stock fund?

from Panicked in Michigan

Q: I am losing so much in my 401(k) (from peak of $195,000 now down to below $145,000 on 3/22/01) that I am very tempted to withdraw all of it and put it in a 6% interest account to keep from losing more. I hate to do that because it would take so many years to make up what I have lost already. I would prefer to "tough it out" in hopes the market will turn around. I am 60 years old. 

This fund was one of the options for my 401(k) at my former place of employment. The only non-stock fund is the 6% interest which only fluctuates slightly. In '98 I lost out some because after pulling out of the S&P equity 500, I only reinvested part of the money, then gradually all of it----at the wrong time! 

Should I just take my losses and get out of this stock fund before it gets any lower?

A: (Lou)  Unfortunately for you, it sounds like you are a prime example of someone who chased returns in the past and should have diversified instead. A 6% return may not look so bad when you consider that according to Morningstar's Principia Pro software, the S&P 500 from January 1, 1998 thru February 28, 2001 (3 years, 2 months) has compounded at only 9.46%.

Your situation is a tough one. Fortunately, you probably have a long life expectancy to build your balance back up (you're only age 60). However, it may take a couple of years to get back to even assuming normal (8% to 13%) returns. It sounds as if your existing fund choice is heavily weighted with technology stocks. If you continue to stay the course while the fund could recover it could just as easily go down another 25% from here. 

My advice would be diversify into some value funds including small stocks. Also consider placing some monies (20% to 30%) in the fixed income fund that you have available. Having accomplished this, I would seek out some professional counsel and move the monies into an IRA rollover account (you are eligible since the money is at a former employer) at a discount brokerage firm where you have almost limitless investment options. I would then invest into a well diversified portfolio of mutual funds that includes fixed income investments, large and small, growth and value domestic equities, international stocks, REIT's perhaps a few hedge oriented funds (a non-similar pattern of return to the S&P 500.)  This should lower your future volatility yet provide you with normal long term returns ( 9% to 12%). 

Should I stick with Janus 20?

from Gem

A: (Lou) Janus 20 has been a very good, but volatile performer over the years.  You would not want to have the fund drop dramatically when you are about to retire.  

It may be that the fund is too big and that the Janus Fund Group owns too much of the same stocks that has increased its volatility recently.  I would recommend selling part of your position and diversify your IRA assuming you have no other investments.  If you have your IRA at Janus directly, you may want to consider moving money into their value fund and/or the Flexible Income Fund.  

Better still is to open an IRA at a discount brokerage firm and build a diversified portfolio from other fund groups.  Your Janus 20 fund can be transferred in kind and your position will be maintained until you have the opportunity to select other investments with at least part of the monies.

What are institutional shares?

from Charlotte

A: (Paul)  Shares are considered institutional by how they're held, i.e., by mutual fund companies and large pension funds.  These shares are usually traded in large blocks of shares which often times reduces trading cost and are only available with rather large contributions.

However, to your task at hand, I would suggest you separate the function of administration of 401(k) and the investment management of those contributions.  Find someone who's only function is the operation and administration of retirement plans.  And then complement that function with an investment advisor who specializes in asset management and that will allow you the best of both worlds. You'll have someone who can concentrate of keeping your plan in compliance, avoiding top heavy plans and someone who can offer you the most flexible choices that are best suited for your employees, whether stocks, bonds, no-load mutual funds. 

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