Ask MAX: Why Is My Gold Fund Down?

October 31, 2008

Stacey Asks:

Why did Evergreen Precious Metals A (EKWAX) tank so badly? Is there a bright side?"

After Monday’s drop, Evergreen Precious Metals had fallen about 68% since its peak in March 2008. That's more than the S&P 500, Dow, Nasdaq, MSCI EAFE Index, junk bond market, emerging market bond market, classic car market, housing market, and subprime loan market. Okay, maybe not more than subprime, but you get the point.

What's most surprising, and probably the root of your question, is that the fund has fallen far further than gold itself, that shiny metal that comprises the core of the precious metals funds. If you compare this fund to the Gold ETF (see streetTRACKS Gold Trust ETF [GLD]), you won't be impressed with your fund's performance. But if you compare it to other gold funds, you might feel a bit better. Popular gold funds like Vanguard Precious Metals And Mining (VGPMX), Fidelity Select Gold (FSAGX), Oppenheimer Gold & Special Miners (OPGSX), Franklin Gold And Precious Metals (FKRCX), and USAA Mutual Funds Precious Metals (USAGX) are in equally rough (or worse) shape.

As it turns out, gold-related companies are no more magical than any other commodity-related companies you'd find in a natural resource fund. We've just witnessed one of the fastest drops in broad commodity prices in history. The fact that the nosedive followed the launch of dozens of commodity funds inspired by investor fascination with 'hard assets' should come as no surprise. the rest of this article»

Schwab YieldPlus Investors Run After Fund Goes PriceNegative

March 28, 2008

Ultra short-term bond funds have been collapsing since early July 2007, and the carnage is going from bad to worse. Apparently investors in these funds - billed as slightly higher risk alternatives to money market funds - are liquidating in droves:

Ultra-short bond fund Schwab YieldPlus (SWYPX) is the latest victim of the credit crisis. It has fallen 16.8% for the year to date through March 26, ranking dead last in its category, and as a result, investors have been fleeing the fund. Assets have fallen precipitously from a high of $13.5 billion in June 2007 to just $2.5 billion as of March 20.

The fund's sizeable loss in recent months is certainly shocking, as ultra short-term fixed-income securities are generally perceived to be safe investments with minimal interest-rate and credit risks..."

Schwab YieldPlus has fallen almost 20% since late January 2008 - four times more than the Nasdaq drop during the same period - which is particularly troubling because the upside of the fund was slim - perhaps 1% more than an investor would get in a traditional low-fee money market fund. As Schwab's website notes, "the fund’s objective is to seek high current income with minimal changes in share price. " This is the type of fund an investor might park some cash they need in a few months to pay for college tuition or to buy a house - or just to avoid the risk of the stock market or even longer-term bond funds.

Ultra short-term bond funds' trouble started last year. The adjustable rate mortgage and corporate debt these funds invested in was far riskier than the investment grade ratings would lead one to believe. The current trouble has as much to do with the open-end fund structure itself as with continuing home-loan and other adjustable debt mark downs: when investors panic sell all at once the fund manager has no choice but to sell portfolio holdings at the same time to raise cash - often at lower prices than the fund thought the holdings were worth.

Sudden increased selling by fund shareholders leads to lower security prices of the fund holdings which drives the fund price or NAV down even more, which in turn leads to more fund investors selling. As many of these types of funds have "Free, unlimited checkwriting" and all have no redemption fees, there is nothing standing in the way of nervous shareholders getting out. Selling at large funds like Schwab YieldPlus can drive prices down for other funds that own the same or similar securities as well. Mutual funds in such a death spiral will not come back to their original price even if the hard hit portfolio holdings rebound in price.

See also:

Why You Should Worry About Your Bond Funds
Is Your Bond Fund a Ticking Sub-Prime Time Bomb?

Ask MAX: A Fund with an 18% Yield?

October 6, 2007

Mike asks:

I recently received an email solicitation for the 'High Yield Investing Newsletter,' featuring a mysterious diversified fund called The Korea Fund (KF) which sports a whopping 18.4% dividend with a 34 .4% projected yield! Is this even possible?"

It is, in fact, possible for a diversified fund to yield 18.4%. But of course, there is a catch. This kind of yield is best avoided. The income newsletter's marketing department has clearly opted to transform lemons into lemonade. So let’s get to the bottom of this allegedly attractive investment opportunity.

There really is no such thing as a free lunch when it comes to investing. When stocks pay dividends that beat the S&P 500 (which is currently yielding under 2%) by such a large margin, there is always a reason... the rest of this article»

Ask MAX: You call THIS a MAXadvisor Favorite?

August 27, 2007

Russ Asks:

You call the Vanguard Precious Metals & Mining Fund (VGPMX) a MAXadvisor Favorite Fund, but it has a MAXoutlook of -16%. Why do you call a fund a MAXadvisor Favorite if you think it is going to perform so poorly in the next year?"

How can we like and hate the same fund? We’re not bipolar – here’s how it works:

We give MAXadvisor Favorite honors to at least one fund in every stock fund category. No matter how well we think a category is going to do , we'll try and find the best funds available to you. You'll find a Favorite Fund listed in some categories we think are currently a very bad place to be invested - categories like real estate, Latin America, and yes, precious metals.

Our MAXoutlook is our forecast for a fund’s performance over the next twelve months. This figure is largely driven by our forecast for the fund’s category, the fund’s quality and fees, and the fund’s risk level. Safer funds generally don’t have big negative forecasts even if the category ranks poorly. the rest of this article»

Ask MAX: Gold or Silver

December 8, 2005

Wendell from Florida Asks:

I hear a lot about buying gold, but what about silver? Is it a better buy and will it appreciate more quickly?

Gold gets most of the precious metals investing attention because gold bugs and other crazed anti-central bank fanatics think that gold is money, not a mere commodity like silver or platinum. Get these quacks going on about the good ole’ days and they will wax poetic about how unstable the world has become since we got off the gold standard — ignoring the 13-fold increase in stock prices and explosive growth in the economy that has happened since Nixon put the gold standard to rest for life (we hope). Meanwhile, gold and silver are still cheaper than they were over twenty years ago. the rest of this article»

Ask MAX: A Good Place for Some Short-Time Money?

September 22, 2005

Chris from Tempe asks:

I'm 32 and have been saving pretty heavily for three years. I was planning on buying a house, but there is also a possibility that I will use the money to start a business. I should have enough money accumulated to make the down payment in roughly one year, but I want to have access to the money in the interim in case I go the business route. I realize that stock funds are too volatile for short-term savings so I am wondering; what is a better place than my bank's low-interest savings and checking accounts to keep my money safe for such a short period of time?

You're right on about stock funds being too risky for a short-term investment. There really is no stock or bond fund that is immune from at least some degree of volatility. Even the MAXadvisor Newsletter's Safety Portfolio can get hit with short-term losses, which is exactly what investors like you don't want when they absolutely, positively don't want to suffer any loss of capital.

As you mentioned, your bank's savings accounts are certainly safe (in fact, they are largely insured by the government), but the amount of interest they generally pay is so low (especially for smaller balances) that you could do almost as well burying your loot in the backyard. Fortunately there are several attractive options for a guy in your position. Here's our short list the rest of this article»

Ask MAX: Can I build a fund portfolio with just $17,000?

March 16, 2005

Leena from Maine asks:

I read your article that recommended that investors with less than $15,000 invest in a Vanguard fund. Well, I have $17,000 to invest, and wanted to know how I should invest it. I took your risk quiz and am a moderate investor."

You’re referring to this article in which we advised Matthew, a young Navy sailor serving in Iraq, to invest in the Vanguard LifeStrategy Growth fund via an auto-investment plan. Matthew was starting out with just $2,000 (while adding $500 per month), and we told him to invest in this single Vanguard fund because it would give him a high degree of diversification (this particular fund is a collection of funds that owns other Vanguard funds) with a low initial investment requirement.

We told Matthew to stick to the Vanguard LifeStrategy Growth fund until he had grown his portfolio to $15k, then to come back to us to discuss where he should go from there. While the fund has risen more than 5% since Matthew asked his question back in November, we’re pretty sure he hasn’t reached the $15k threshold yet – but we’re guessing he wouldn’t mind if we answer your question in the meantime. You are starting out with more money than Matthew, but you are facing similar problems. Every investor, no matter how much money they are starting out with, should aim for certain goals when building an investment portfolio: diversification, low fees, and the right risk level. the rest of this article»

Ask MAX: Investing $20 a month?

February 24, 2005

Katherine from California asks:

I’m 21 years old and interested in starting to invest $20 a month, what do you recommend?"

Most people don’t start investing until they have more money to invest. However, investing smaller amounts of money for a longer time period can be even more beneficial than investing larger amounts later in life.

It sounds impossible, but $20 invested today could be worth $500 when you hit 70 years old – and that’s using a fairly conservative growth rate below the historical stock market return.

Sadly, it can be difficult to invest small amounts of money. While you can always save in a bank account or even in a money market mutual fund, you’ll get a bigger bang for your buck in a lower fee mutual fund that invests in stocks. Mutual funds allow a small investor to invest in dozens of stocks for a reasonable fee.

Most good mutual funds require investors to fork over $2,500 to get started, although there are many good ones that require $1,000. Better for your situation, some waive the minimum if you agree to invest a small amount of money each month. the rest of this article»

Ask MAX: Avoid Buying Funds In December?

December 7, 2004

Martha from Ohio asks:

I was told by a friend that I shouldn’t buy mutual funds at the end of the year because I can be hit with additional fees. Is this true?

Your friend was referring to capital gain distributions, which are actually a different animal than ordinary mutual fund expenses (like management fees, expense ratios, or 12b-1’s). But while your friend is right (cap gains do pose a potential risk to investors who purchase a fund near the end of the year), the distribution trap is a hazard that can usually be avoided with a simple phone call. the rest of this article»

Ask MAX: Where do I start?

November 10, 2004

Matthew asks:

I’m 21 and in the U.S. Navy, currently serving on the ground in Iraq. I have saved about $2000 and I plan on saving and investing an additional $500 a month. I want an investment that will grow, but I don’t want a crazy amount of risk either. How should I invest? Thanks!"

I don’t claim to be the Amazing Kreskin, but allow me to look into the future and reveal to you this: you are going to be a terrifically successful investor, and you’ll retire fat, rich, and happy.

How do I know? Because you’re just 21 years old and you’re already building an investment portfolio, and because right off the bat you are being sensible about risk.

Starting early means that you have years upon years of compounding returns coming your way. The money you invest will make you money. Then you begin making money on the original investment plus the return you’ve made. As your investment grows, you’ll earn a return on a bigger and bigger pool of money.

The fact that you are concerned about risk at your age is equally impressive. Many investors a heck of a lot older than you still don’t realize that they need to consider both the upside and downside potential of an investment. You are quite right in wanting to build a growth-focused investment portfolio, but even aggressive investors should have some exposure to lower risk securities like government bonds. the rest of this article»

Syndicate content