wearmanyhats

Whenever a portfolio is getting pounded as it is for those of us who stayed in the market during this downturn, a person might wonder what on earth will be the first to recover.  The answer is almost universal during times such as these: small cap stocks.

Normally I like individual stocks because their growth can really thrust a portfolio upward during a bull market.  It’s hard to predict which mutual fund will grow in the double or triple digits during the year, but individual stocks are pretty good at doing just that.  However, there are certain windows of opportunity to use good mutual funds, and just about now would be it.  Whenever you feel the market has finally hit bottom, (soon, we hope!) that would be the best time to find a great small cap fund and jump in for good returns.

Mutual funds have fallen by the wayside a bit since ETF’s have become popular.  Make no mistake, ETF’s are superior to mutual funds only when it comes to fees.   ETF’s follow one particular sector, such as GLD follows gold or XLS follows oil, or OIH holds oil handler stocks, and are traded like a stock. Therefore, all you pay is usually a negligable trading fee.

One thing that people sometimes forget about a good mutual fund is that you have experts who are doing the legwork for you, often using first hand investigation.  Mutual fund managers will  talk to top executives in the company as well as analyze company financials all to decide if it is worth buying tens of thousands of shares.  These big funds are sometimes managed by two people, who have a raft of other folks helping gather data on each of their picks.  An ETF takes the good with the bad companies, which is a desireable strategy only if a particular sector is on the rise.

Back to the issue of fees.  While ETF trading is just a regular trading fee, that’s not so with a mutual fund.  If you don’t watch it, fees can chew away at your gains.  The one major piece of advice that I give on this subject is to never pay any kind of front or back fee, also known as an in or out fee.  There are so many excellent no load funds out there that it is worth your time and energy to research out which ones would be the least expensive, with excellent returns.

One last thing to note:  mutual funds are generally less volatile than individual stocks, which means that during a downturn, they don’t drop as far nor as badly as a plain old stock. But their recovery is not as dramatic as a regular stock can be either. 

Which one to chose? A good screener through your broker will help you find some ideas.  Personally, I always like top names because they often attract excellent talent.  Companies like Dreyfus, Janus, and Fidelity are fairly well known.  But don’t underestimate quieter companies such as Marsico, Brandywine and Oak.

Small cap value funds and regular small cap fund traditionally do well during any economic recovery.  While the market is not necessarily there yet to recover, watch and be mindful of a strategy.  Small companies bounce back faster because they are more nimble. Global small caps may produce even more sparkling results.  Be sure to read the prospectus, keeping mindful of all fees that involved, and how soon you can sell out of the fund should you need liquidity. I know that prospectuses are not light reading, but they can be done fairly quickly.  But we’ll save that for another article.

Trackback URI | Comments RSS