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Looking back at the market's future



On a recent flight from Newark to Frankfurt, my seat mate asked me when the market going to turn around. A long-time 401 (k) investor, she ---like others---has seen the value of her holdings dwindle and seemed frustrated about the future, her current holdings and what to invest in next. While no one knows for sure what the markets will do one day to the next never mind year-over-year, if history is any guide, perhaps things might be looking up in the not-so-distant future. As for which funds to invest in, like the market, that's always been difficult to call.

If you believe in market trends, the months of September and October historically have been lousy months for stocks. Come November, however, it's another story.

According to research, the six-month period from November to April have been good ones for stock returns and the six-month May to October period lousy. Although no one knows the precise reasons why, the numbers make a compelling story as noted in a recent Barron's story titled Fortuitous Overlap, written by Sandra Ward.

In the side-bar accompanying the piece, it was stated that, "Since 1950, stocks, as measured by the Dow Industrials, have had an average gain of 8.2 percent in November-April stretch versus just 0.4 percent in the remainder of each year. "

Translate that data into dollars and $10,000 invested in only the six-month November through April spans each year yielded some handsome returns over the long-haul versus money invested only from May through October. (In both cases, the strategy involved getting in to and out of the market in six month intervals.) Here's what the numbers showed: For the past 52 years, those investing in the six sweet months of the year, November 1 though April 30, would have seen $10,000 grow to over $457,000. Those investing in the six sour months, May 1 through October 31, would have less money than they originally started with, $9,923.

What's that mean to the mutual fund investor? For those choosing equity funds, perhaps a little hope. The kind of hope that goes beyond wishing and shows that markets have some peculiar ways.

As for what to invest in now, closed-end muni funds are hot. Eaton Vance raised $1.55 billion in its initial public offering of three closed-end municipal bond funds in August. According to Meg Pier, vice president and director of public relations, " We believe that represents the largest amount of assets raised in closed-end munis this year by any group of funds."

Closed-end funds are like open-end funds in that each represents a basket of securities. They differ, however, from open-end mutual funds in a number of ways. One of them is, unlike open-end funds, closed-end trade just like stocks do---on the major exchanges and all day long. Like stocks, their per share prices may change throughout the day and to purchase or sell shares requires paying commissions. Another difference--- only a fixed number of shares of each fund are issued.

The three closed-end funds Eaton Vance recently brought to market are the Eaton Vance Insured Municipal Bond Fund, (EIM); the Eaton Vance Insured California Municipal Bond Fund, (EVM); and the Eaton Vance Insured New York Municipal Bond Fund (ENX).

In the open-end fund arena, for those researching funds and looking for those that are large and well-diversified, Morningstar has a suggestion--look at a fund's R-squared figure. It's a measure of how closely a fund's return moves in sync with an index. On the Morningstar domestic stock fund reports, the index the R-squared figure is compared to is the S & P 500. If you're trying to figure out what that measurement means, think diversification. R-squared numbers that are above 90 indicate that the fund's diversification is similar to the index. Those below it show greater diversification. So, the lower the R-squared number, the less it mirrors that index.

Using Morningstar's research, here are the names of five stock funds with more than $10 billion in assets and low R-squared figures: Fidelity Growth Company (FDGRX), it has an R-squared of 39; Vanguard Windsor 11 (VWNFX), its R-squared is 41; T. Rowe Price's Equity-Income Fund (PRFDX) has an R-squared of 46; American Funds Washington Mutual (AWSHX), also an R-squared of 46; and the Fidelity Low-Priced Stock (FLPSX) has an R-squared of 49.

That being said, don't forget that R-squared is just one tool to use when researching a fund. And, that that number can and will change as the fund's holdings ---or those in the index it follows-- change.

As always, whether trying to predict where the market is going or which funds to invest in, there are no guarantees only guideposts.

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Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.


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