Quarterly Mutual Fund Guide: Plan now to fix your 401(k)

ByABC News
October 7, 2008, 4:46 AM

— -- The past three months have been so bad for mutual fund investors that it's hard to look away. But a big part of investing is looking to the future and, if you take a few steps now, your 401(k) retirement plan should be in the recovery room soon.

Let's start by surveying the damage. Stock funds fell 11% in September alone, the worst month since August 1998, says Lipper, which tracks the funds. Diversified U.S. stock funds fell 10% for the three months ended Sept. 30. A full 87% of all funds showed a loss in the third quarter.

Some of the heaviest losses came in two areas that investors traditionally view as portfolio hedges.

Gold funds plunged an average 30.7%. Gold itself started the quarter at $930.25 an ounce and finished September at a 6% loss. Most gold funds, however, invest in gold-mining stocks, not the metal itself. And the prices of gold mining stocks reflect investors' views about the future price of gold, not the current price.

International funds were crushed. The average large-company core international fund plunged 20.9% in the fourth quarter, slammed by a one-two punch of dreadful overseas markets and a rise in the value of the U.S. dollar.

Foreign markets typically plunge when the U.S. stock market falls, and this time was no exception. The Europe, Australasia and Far East index tumbled 13.6% in the third quarter, vs. 8.9% for the Standard & Poor's 500-stock index. The rise in the dollar just made things worse. When the dollar rises, the value of U.S. investments overseas falls. When you take currency conversion into account, EAFE fell 21.5%.

Finally, those who were betting on $200-a-barrel oil didn't count on how badly the prospects of a recession would hurt the oil market. Natural resources funds, which invest mainly in energy stocks, plunged 32.7%, while global natural resources funds tumbled 33.3%.

For many retirement investors, a 10% loss is nothing to be sneezed at. The average diversified fund is down 21.5% the past 12 months a significant drop for any portfolio. What can you do to repair the damage?