No place to hide for any type of investor

For months, many mutual-fund investors could take comfort in this: They had endured worse during the tech-stock collapse.

The hard lessons learned from that earlier, harrowing ride led many to believe they were better positioned for this bear market.

But U.S. stock-market declines during October were so deep and wide that even tame investments were pummeled. Losses from the steep plunge that began just over a year ago now top those from 2000-02.

The average diversified mutual fund of U.S. stocks returned a negative 18.7 percent in October, according to preliminary figures from fund tracker Lipper Inc. As of Thursday, that average fund was down 40 percent since the Dow Jones Industrial Average hit a record high on Oct. 9, 2007.

By comparison, during the previous bear market, between March 10, 2000, and the bottom on Oct. 9, 2002, the average diversified stock fund lost 34.9 percent.

The past month has been a vivid reminder that sometimes, no matter how conservative an investor you think you are, you're going to get hit. Those who sought havens in what were once considered the safest of stocks saw their holdings battered as fears of a serious recession mounted.

Even those who shunned stocks for once-boring bond funds saw their portfolios dragged down as the ripples of the credit crisis expanded outward. There were few places to hide.

The average return for diversified U.S.-stock funds is a negative 34.7 percent for the first 10 months, which suggests 2008 is shaping up to be the worst year for mutual-fund investors in the nearly 50 years for which Lipper has such data.

Many market professionals predict that an era of low stock-market returns has begun. In their view, many investors, particularly baby boomers set to retire in the next 10 years or so, face a choice of either modest yields and ongoing risk in the stock market, or quitting the market altogether.

History shows the average investor generally makes the mistake of bailing out at market bottoms, said William Bernstein, a financial adviser in North Bend, Ore. Such an error is doubly costly, Bernstein said, because the investor not only locks in losses but is likely to miss out on a market rebound as well.

Investors who are at or near retirement age should have had a “nice pad of bonds,” Bernstein observes, “but many didn't.”