MUTUAL FUND INVESTING

HOW TO WEATHER CHOPPY MARKET SEAS

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Being prepared can help you see beyond temporary dips in mutual fund values

The low-interest-rate environment of the 1990's has spawned a new breed of investor--hungry for higher returns and looking for them in the mutual funds.
As yields on interest-earnings securities declined over the past several years, investors turned in droves to mutual funds. Based on figures compiled by the Investment Funds Institute of Canada, investment in mutual funds exploded to almost $1.50 billion at the end of 1995 from $34 billion in 1990.
It's true that mutual funds have potential for higher growth. But if you're new to the game, brace yourself: Unlike Guaranteed Investment Certificates (GICs) and Canada Savings Bonds (CSBs), the value of your mutual fund investment is not guaranteed.
Sooner or later, most mutual funds will experience a temporary downturn in unit value.

Risk vs. reward

Your first step is to acknowledge the relationship between risk and reward. Highly secure investments, like money market funds, are reliable, but the returns are tied to current interest rates. If you're looking for better performance, you'll have to accept more risk by investing n bond and equity funds. While bonds and equities are more volatile, over the long term, they provide superior returns.

Successful fund strategies

Here are some guidelines to help you weather the inevitable market downturns.

Know how your investments behave. Knowing the potential volatility of your funds--that is, how much they fluctuate in value in the shorter term--will help you maintain your perspective during a performance crunch.
Look at the fund's average annual compound return over five years or more. This figure will help you compare returns of different mutual funds. Then, check the year-over-year returns to give you an idea of volatility.
In addition, always read the fund's prospectus for information. It will outline the fund manager's investment style and clearly identify the potential risks involved.
Assess the amount of risk you are comfortable with. If you cannot bear the thought of your hard--earned cash going into an investment that might go down in value--even it is means you could make a substantial profit over the long term--stick with guaranteed or low-risk investments like money market funds, GIC's or CSB's.
If the prospect or market fluctuation doesn't alarm you, and you're patient, consider devoting part of your portfolio to investments that are geared for growth. Know yourself and know what your's getting into. Your financial advisor can help.

Diversify your investments. Spreading the risk means picking a variety of investment types.
Even if you have a high risk tolerance, for example, it's not wise to place all your money in aggressive investments. Holding a variety helps to protect your portfolio from declines. While one type of fund declines, other funds could be growing.
Getting professional advise to tailor a diversification plan for you is a good investment.

Take a long-term approach. The longer your time frames, the better chance you give your investments to perform to their potential. As noted above, equity mutual funds have historically earned more than interest-paying securities. However, over short periods, they are usually more volatile. The key to success for these funds is to focus on the long term.

Don't panic. Don't sell just because your unit values decline. As the example below shows, chances are that the unit value will turn up again. If you bail out at the bottom, you're locking in losses, and missing out on potential future profits.

Don't jump from fund to fund. Many investors are prompted to change their portfolio on the basis of unusually strong one-year returns in another fund or another type of investment. Last year's winner isn't necessarily going to be next year's top performer. If you're always chasing last year's winner, you'll always be a year behind. Instead, focus on high-qualify funds whose objectives match your own.
Before you invest your money in mutual funds, do your research, and consult a financial advisor. Be prepared to enjoy the market uptrends, and to wait out the inevitable declines. In the end, if you've chosen wisely and monitor your investments regularly, they should grow to their potential.