by Paul Oranika

Created on: December 25, 2006   Last Updated: January 12, 2009

Mutual Funds in your 401k

2008 was a very rough year for investors, mutual funds suffered significant losses for the year. Majority of mutual fund categories had negative returns in 2008, mutual funds lost between 40-50% in 2008, according to data released by Lipper Inc, a mutual fund tracking firm. Many investors already know this from their 401(k) account statements. The Standard & Poor's 500 was down 40.88 percent while the Dow Jones industrials gave up about 36.16 percent. Don't get me wrong Mutual funds are good investment instruments, and should be a part of 401k retirement accounts, but after such a tough year, investors must take stock and retool their 401k mutual fund portfolios, and if you are like most of us, this is a good time to take stock of which mutual funds should be included in your portfolio.

Some sectors did better than others, or put it another way, they lost less than others, for instance, Commodities funds' negative return came up to 44.48 percent for the year while Global financial services funds returned negative 50.15 percent. Utility funds produced negative returns of 36.37 percent for the year. But as you can see, there are disparities in the percentages of the losses by sector. The only category that gained in 2008 is the so-called short-bias funds. These are the funds that make money during market declines. They actually gained 36.16 percent for the year.

The point here is that in choosing mutual funds for your 401k, it is important to construct a more balanced portfolio of stocks, one must note that most mutual funds take long positions. Such positions only make money when stocks gain in value, and loose when their value drops. There should be some place for short-biased stocks in your 401k stock portfolio, although it requires the expertise of knowledgeable portfolio managers, one must strive to maintain a more balanced 401k stock portfolio, by including stocks from different sectors, and well as those with different investment trading strategies such as the short biased funds as discussed.

A typical 401k stock mutual fund portfolio should consider including mutual funds such as Vanguard Prime cap fund, (lost only 31.9%), Fidelity Blue Chip Growth fund, American Funds American Mutual A, Vanguard Small Cap Growth Index, as well as Oakmark International. While these funds also lost money in 2008, their losses were considerately more moderate than many other funds, but consider the fact that 2009 may see some recovery from the

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