Beware! On This Page Lurk 19 of the Scariest Funds
We've traced the phone call, and it's coming from inside your portfolio!
Want to scare your nest egg? I've assembled a murderers' row of some of the most menacing mutual funds around. If you're squeamish, stop here, and don't read any further. Chicken ...
The Interest-Rate Shocker!
With interest rates at record lows, funds are particularly vulnerable to a spike in rates. To find out how risky a fund is, check its duration. The rule of thumb on duration says that you multiply the amount that rates rise by the fund's duration to get a rough idea of how much you'd lose when rates rise. So, a typical core bond fund like Vanguard Total Bond Market Index (VBMFX) has a duration of 4.4 years. If rates rise 200 basis points, you might lose around 9%. This is why author Bill Bernstein is recommending short-term bond funds.
But there are funds that have much greater durations and might have tempted the yield-hungry. The retail fund with the greatest duration is Rydex Government Long Bond 1.2x Strategy Investors (RYGBX) with hefty 16.9 year duration. The fund is working on a good year, which could be its seventh top-quartile performance in the past 10 years. But the bad years more than make up for the good. The fund lost 31.2% last year, and the fund's 10-year returns are bottom decile. This is an extreme case, but even more widely held long-term funds deserve a close look, so that you can be properly prepared for a rate reversal.
Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.