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What Investments will Do Well

- Alan Lavine and Gail Liberman



Will last year's winning mutual funds be this year's winners?

Research on persistency of performance shows that the prior year's top performing investments do well the following year. The reason: The fund manager is on track.

However, this year could be a different ballgame. A lot depends on the war with Iraq and how fast the economy will recover.

Precious metals mutual funds were up 63 percent in 2002, according to Moringstar Inc., Chicago. These funds primarily invest in gold mining stocks. Gold may perform well if we go to war. And if the economy and inflation pick up steam later on, gold funds may continue to do well.

Be advised: Gold is a volatile investment. Financial advisers say that you should keep about 5 percent of your assets in gold as a hedge against stock and bond market losses. But gold can go through long periods of under performance. So you really have to be patient.

What about bonds? Bond funds were up about 7 percent last year. The shorter the term to maturity, the lower the risk. Interest rates are at a 40-year low. Experts say there is nowhere to go but up. Bond prices and interest rates move in opposite directions. Bond prices fall when rates rise and visa versa.

Check the "duration" of a bond or bond fund before you invest. The duration tells how much the value of the bond will rise or fall with a 1 percent rise in interest rates.

Short-term bond funds have duration of about 1.7 years. So if rates rise 1 percent, the bonds will drop about 1.7 percent. But because the bond funds yield around 3 percent, the total return on your investment will be about 1.3 percent.

On the stock side, funds that invest in large company undervalued stocks that pay dividends may do well. Companies that pay dividends and increase their dividend payments are profitable and well-managed. The Franklin Rising Dividend Fund, which has grown at a 9.8 percent annual rate over the past five years, invests in companies that are raising their dividends.

Morningstar recommends this top-rated fund. But it charges a "load" or commission.

On the no-load side, there are: T. Rowe Price Equity Income Fund and the American Century Equity Income Fund.

If President Bush's proposal to eliminate the tax on dividend income gets adopted, mutual funds that invest in dividend paying stocks should benefit.

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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).


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