When stock markets began to whipsaw this summer, Tony Zabiegala decided to take some money out of stocks. The Cleveland-based adviser reduced most of his clients' equity exposure, getting down to just 10% for the most risk-averse. But while it seemed like the right move through the ups and downs of August and September, when stocks rallied in October, Zabiegala and his clients mostly missed out. "We didn't see it coming," says Zabiegala.
He's not alone. Picking winners during the past few months of uncertainty has proven difficult for most investors -- even the pros. While stocks are up 5% for the year, they've had an unsettling climb. Many investors have fled stocks for bonds, only to find that most bond yields are sinking and most bond fund managers are trailing their benchmarks thanks to bad bets on riskier issues. Even investments that are supposed to zig when the market zags, like oil and gold, have been moving much closer with stocks, making it difficult for investors to figure out the next step. "Many investors are looking around for ways to hedge their portfolios risks," says Christine Benz, director of personal finance for Morningstar. "Some of those bets have not been particularly profitable so far."
Of course, some of these bets will eventually pay off, say financial advisers. Many are telling clients to sit tight through this rocky market -- and for good reason: Study after study has shown that most investors can't accurately time the market's ups and downs; they buy high and sell low. Inertia, on the other hand, is often rewarded: An investor who invested in the S&P 500 in March 2009 is currently up about 95%, including dividend payments, says Andrew Goldberg, market strategist for J.P. Morgan Funds.
That said, there are some investments financial advisers recommend dumping or scaling back on or avoiding if you don't already own. Some have already seen their best days; others simply don't provide strong enough returns to offset their high costs. Below are four investments advisers say you should think twice about before owning.
Closet Index Funds
With stock market gains inconsistent, advisers say finding a low cost mutual fund that won't erode your returns in fees is extra important. Few investors who go the active route are seeing the benefits: the average actively managed large blend fund is underperforming the S&P 500 index so far this year by 3 percentage points, according to Morningstar. Many investors might be better off in a low-cost index fund that will at least match the index, says Benz. The cost of fees adds up dramatically: paying the average 1.04% fee on an no-load actively managed large blend fund instead of the 0.18% fee on the Vanguard Total Stock Market Index fund (VTSMX) can cost you an additional $3,000 over 20 years, according to Morningstar.
Some funds are even more expensive and often simply move in line with their benchmark index, says Diane Pearson, an adviser with Legend Financial Advisors. Take the $1.8 billion Legg Mason ClearBridge Fundamental All Cap Value fund (SHFVX), which tends to move in line with the S&P 500 index but has lagged it by an average of more than 2 percentage points a year for the past five years. In addition, the fund charges 1.32%, compared to the average 1.14% for other large cap front load funds, according to Morningstar. Legg Mason declined to comment.
Of course, advisers say there are some smart managers worth the higher fees. But many say it's best to save active management -- and the higher costs that come with it -- for asset classes like fixed income or small cap stocks where it takes more work to determine value and an analyst digging for smart picks can really add a bonus. "You don't want to pay 1.7% on a fund that tracks the S&P 500,"says Pearson.
The market volatility of recent months has pushed more people to hold more cash. But experts say locking money up in a certificate of deposit -- where the yield on a one year CD is averaging 0.35% -- is a sure way to burn through your savings. Even five year CDs with their average rate of 1.17% don't offer much relief. The annual inflation rate is hovering around 3%, so investors who hold cash in a CD are sure to see their spending power wane, says Goldberg of J.P. Morgan Funds. "You're guaranteeing that your money is going to be gobbled up by inflation," he warns.
Retirees may be one exception because principal preservation is a top priority, says Greg McBride, senior analyst with Bankrate.com. People looking for CD alternatives should look into high-yield checking accounts offered by regional banks and credit unions, he says. These accounts often pay interest rates that can help you keep pace with or even beat -- inflation. The downside: The accounts often have many requirements, such as a minimum amount of debit card purchases and requiring users to receive online statements.
Yields on 30-year Treasury inflation-protected securities, or TIPS, have come down from almost 2% at the beginning of the year to less than 1% today. That's a sign investors have been buying up the bonds, driving up prices and, consequently, lowering yields, say advisers. With TIPS, the principal is adjusted based on inflation. But the measure used to make that adjustment may not match up perfectly with the pace at which your specific costs are rising, critics say.
Also, investors who buy the bonds today could end up losing money if inflation turns out to be mild in the coming years, says Benz of Morningstar. "If inflation runs lower than the number your TIPS bond has factored in then you would have overpaid," she says. TIPS can still offer broad inflation protection in the long term, says Benz, especially for seniors who are no longer earning wages. But investors should buy the bonds in small amounts and try to time their purchases when prices are low, she adds. It also helps to hold other inflation hedges, like commodities, says Pearson.
The Gold Rush
Investors piled into the yellow metal this year, pushing gold prices up to record levels. Gold peaked at $1,920 an ounce in September but then fell to $1,600 in less than three weeks as spooked investors took profits and sought to build up cash reserves. Prices have since bobbed above and below $1,800 but analysts say there's no telling for how long. Gold has typically done well when markets are volatile, but investors spooked by rough markets this year have sold their gold along with stocks, making gold a less reliable way to diversify a portfolio, says Goldberg.
Still, gold bugs point out the metal is still far from its inflation adjusted high of $2,400, reached in 1980, as a sign that gold still has room to run. But advisers say it's best to keep gold to a minimum of the portfolio -- no more than 10%. Benz recommends getting broad exposure through a mutual fund or exchange-traded fund that invests in a mix of commodities, such as the iPath Dow Jones-UBS Commodity Index exchange-traded note (DJP),