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Mutual Funds Prices Move With Stock Market

- Alan Lavine and Gail Liberman

What drives stock mutual fund prices?

Most of the time, when the Dow Jones Industrial Average or the S&P 500 stock market index are up, your common stock mutual funds is up. Reason: Stock funds have about a 90 percent correlation to the overall stock market. This means that nine times out of 10, your mutual fund follows the stock market.

What drives the stock market?

The bottom line: Expectations about future corporate profits. The current price of a stock represents the value of the stock based on expected earnings. Ed Yardeni, noted economist and chief investment strategist with Oak Associates Ltd., Akron, Ohio, believes there are a lot of businesses that should profit from the economic situation today.

"The new era of low inflation and low interest rates isn't over," he says. "The new era of competition isn't over. So businesses will have to continue to boost productivity and to innovate to remain competitive."

Yardeni says that technology will remain one of the best sectors in which to find fast-growing companies.

Health care stocks also look good. The baby boomers are still aging, creating investment opportunities in health care. Their net worth continues to rise to new highs and they are preparing for retirement, creating investment opportunities in finance.

Long-term growth opportunities exist in the oil and gas sectors of the economy.

Yardeni is optimistic. He believes investors once again are turning bullish on stocks, particularly stocks of companies with fast-growing earnings.

If heÕs correct, investors should make sure they own large and small company growth stock funds.

The easiest way is to own growth stock index funds. Index funds typically outperform more than 50 percent of actively managed growth stock funds. One of the lowest-cost ways to invest is to stick with Vanguard GroupÕs stable of index funds.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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