Personal Finance: Unloved stocks have paid off

If you were too scared to look at the mail from your broker or 401(k) or IRA provider in the last couple of years, fear not.

The statement that arrived recently probably will look sweeter as long as you didn't flee the stock market. The first-quarter reports provide a stark example of how the market runs in cycles, sometimes moving from delightful to frightening, and other times from frightening to delightful. Stocks have been in the delightful phase since March 2009, after one of the most horrifying times in market history.

The average stock mutual fund gained 6 percent in the last three months, and 46 percent in the last 12, a nice reward after the terror of 2008 and early 2009.

On the other hand, if you ran from stocks and put your money into bond funds, you might have received a nasty surprise. If you had invested in funds that held U.S. Treasury bonds, you probably lost about 4.6 percent in the last 12 months, according to Lipper Inc., which tracks funds.

Bond funds go through cycles, too, and can lose money when interest rates climb or are expected to climb, the case lately.

When people see a loss in a fund, they may think they have a bad fund. But that's not necessarily the case when cycles are at work. Good fund managers lose money on safe bonds, such as Treasuries, when the cycle is against them. And weak fund managers can win on stocks when a strong cycle carries the overall market higher.

Here's what might be at play in your most recent results:

Unloved to beloved. If you dared to buy the financial companies that looked as if they would collapse in 2008, you have been rewarded. And if your mutual fund manager loaded up on them, your stock fund probably did better than average.

Mutual funds that invest only in financial-services companies, such as banks, climbed 12 percent on average last quarter, and in the last 12 months you would have made an average of 62.6 percent in one of these funds, according to Lipper.

Financial companies are a clear example of cycles at work. Typically, groups of stocks may be feared for a while, but then become popular when investors look in the bargain bin of stocks.

That happened with real estate funds, too. Despite worries about empty stores and vacant office space, real estate funds rose an average of 10 percent in the first three months of this year and 93 percent for the last 12.

That does not mean the climb will continue. Usually, investors buy beaten-down stocks such as financials and real estate before recessions clear. When profits materialize, the stocks can be deemed expensive, and investors move to bargains elsewhere.

A category of stocks loved too long can be vulnerable, especially if investors start to doubt profit expectations.

For example, commodities funds, investing in everything from oil to gold, climbed an average of 27.6 percent in the last 12 months, but investors have questioned their values lately. So some have sold commodities, and the funds fell slightly last quarter, according to Lipper.

Misleading high returns. If you have a mutual fund that invested in small companies, which were unpopular in the early part of the recession, they might look like your best funds now. So-called small-cap value funds climbed an average of 10.4 percent last quarter, while funds that invest in large-cap companies climbed 5.7 percent.

Often, the funds that do best coming out of recessions are the ones that invest in small firms. Eventually, investors decide popularity sent prices of small firms too high, and they switch to larger, relatively inexpensive stocks.

So, financial planner Nick Paldrmic is having clients cut back slightly on volatile small-cap funds, but not dump them.

Most financial planners tell investors to hold onto funds that invest in large firms, those that invest in small firms, and ones holding bonds, so they are prepared for any cycle.