Mutual Funds for the Utterly Confused

I have mentioned before that some odd things have occurred in the markets. The S&P 500 may be down 40% over the last twelve months and ten percent just this year but what happens when stocks lose value? They drift from large-cap to mid-cap and mid-cap stocks wander down into small-cap territory.

If you currently own a small-cap mutual fund, settle in for a wild ride. For fund managers, he current environment is presenting some unique buying opportunities. Although the companies in these funds face somewhat greater risks at finding and retaining financing for their businesses, there is no doubt that if they have a good plan, they will survive.

And those that do will be subject to some fire sale buying by larger companies that have downsized themselves right out of growth. If you keep cutting costs to satisfy shareholders, eventually you wind up with a lean, but far less innovative company focused on surviving and not growing. These businesses will look to the expensive land of small-caps to get ahead in the coming years.

In this kind of investment environment, the pressure is on the manager. Shy away from newly appointed fund chiefs and focus instead on those that have made a name for their style. Another thing you might consider as small-caps recover, style will not much matter. It is the quality of the underlying portfolio, the ability of the manager to lead their fund from yet another down market and find your return on investment where other have failed.