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Most of us have heard the old saying "don’t put all your eggs
in one basket," and most people would agree with the general
idea of that statement. However, by early 2000, with equities
continuing to post large double-digit increases,trying to
convince people that a money market fund yielding 5 percent
was a good investment was a difficult task. At the time,
investing in anything other than high growth tech or telecom
seemed foolish. We all knew the economy had changed and
interest rates did not matter – money from venture capitalists
was freely flowing. Technology was no longer prone to cyclical
ups and downs, and it had become a staple everyone needed to
buy in order to stay connected to the Internet and/or be
competitive in business.
Another saying portends, "The more things change, the more things stay the same." Technology and telecommunications are still cyclical businesses, and the stock market cannot rise forever. Where the current bear market ends and the new bull market begins is anyone’s guess. But if you take the long-term view and develop a strategy that will help you reach your goals, then you will be on the right track. Most people have multiple investment goals. Some of the more common goals are saving for retirement, paying for college, buying a new house, or even taking a vacation. Others are already retired and have an entirely different set of goals, such as income generation, preservation of capital, or gifting. The basis for any asset allocation discussion begins with the big three: stocks, bonds and cash. A combination of these three areas will give you the "foundation" to weather the volatility of financial markets at a risk level with which you are comfortable. Proper diversification would have softened the blow to your portfolio during the current bear market. For example, the S&P 500 posted a loss of 25 percent over the three-year period ended June 30, 2002. During the same time, the S&P MidCap 400 was up more than 21 percent, and the S&P SmallCap 600 posted returns in excess of 27 percent. Just having a good mix of domestic equity classes would have made a significant difference. The inclusion of |
Compelling Evidence to Diversify
Source: Lipper - Data as of 6/30/02 international equities, a small gold allocation, and even real estate in your portfolio, which all outperformed the S&P 500, would have provided substantial benefits. Diversification would not be complete without talking about bonds and cash. Your typical money market fund would have been a good relative performer over the past three years, even at today’s low-yield levels. In fact, T-bills have outperformed the S&P 500 over the past five years. Bonds have also outperformed, providing a happy medium between very stable cash investments and riskier stock investments. Bond funds do fluctuate in value and your principal is at risk, but you are compensated for that risk by higher yields. As with most things in life, investing is a risk-and-reward tradeoff. If you desire more return, there is a corresponding amount of risk that must be accepted. A balanced approach to investing is generally the most prudent. A good place to start in determining an appropriate allocation would be our asset allocation tool on our website. We have also provided some timely data on why gold is attractive as well as information on our Near-Term Tax Free Fund (Nasdaq:NEARX). Please see the table below to see its recent performance relative to the performance of the S&P 500 and Nasdaq.¹ |
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¹NEARX ’s annualized total return for the 1-, 5-and 10-year period is 5.65%, 4.76% and 4.93%, respectively, for the period ending June 30,2002.
The Near-Term Tax Free Fund’s annualized total return for the 1-, 5- and 10-year periods was 5.65%, 4.76% and 4.93%, respectively, as of June 30, 2002. **The Tax Free Fund's annualized total return for the 1-, 5- and 10-year periods was 6.18%, 5.28% and 5.75%, respectively, as of June 30, 2002. Performance data quoted represent past performance and investment return,and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The adviser for the Tax Free and Near-Term Tax Free Funds has guaranteed total fund operating expenses (as a percentage of net assets) will not exceed 0.70% through June 30, 2003, or until such later date as the adviser determines. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. |
