Profits through A-Grade Investments

After 1999, investors who went into "growth" mutual funds, vehicles that had explosive earnings prospects, were gloating. Specialized technology and communications mutual funds racked up outsized gains that year. Going global, Japanese and other Asian stock funds posted stunning results. So far, the new millennium hasn't exactly been a bonanza for growth investors. Tech stocks peaked early in the year and then slid. By year-end, according to Morningstar Inc., the Chicago-based mutual fund research company, large-cap growth funds were down roughly 14.09% and specialized technology sector funds produced a 33.13% decline for the year. International funds, particularly those focused on Japan and Asia, plunged, too, losing an average of 31.92% of their value in 2000. When technology stocks fell after the first; quarter of 2000, some investors had severe losses, perhaps the first losses they had ever experienced. Some funds fell 60% to 80% from their peaks last yearIn fact, small-cap and midcap value funds had healthy double-digit returns, due largely to the energy and financial stocks in their portfolios.

Indeed, specialized energy and financial funds performed well in 2000, but the leader was the healthcare sector, where the average fund produced a return of 55.4% for the year, thanks to wide-ranging strength among pharmaceuticals, biotech, medical devices, hospitals, and HMOs.

Funds holding long-term Treasury bonds gained nearly 15.04%, while most other types of bonds funds (corporate, government, and municipals) had total returns of around 9.78%, a satisfying result in a year when the Dow Jones industrial average fell 4.85%.

When identifying mutual funds for your portfolio, you should weigh a number of factors, including the portfolio manager's track record and investment style as well as the fund's expense ratio.

DIVERSIFICATION IS THE KEY To avoid being buried by a similar avalanche, you should hold both growth and value stocks in your portfolio.

LARGE CAPS VS. SMALL CAPS For years, large caps have been the big dogs of the markets. In some years, though, smaller firms will outrace the giants. That means you should plan to invest in some funds with small-cap players. Another potential growth area: international stock funds. You may ask yourself if you really need to hold funds that provided little protection against a downturn in the U.S. market last year.In 1999, for example, Asian and Latin American stocks far outpaced the broad U.S. market indexes. And mutual fimds that invested in Japanese stocks posted a hefty 117% return that year.

ROUNDING UP TECH AND HEALTHCARE FUNDS Not every investor should put money into biotech funds, though. These investments have high peaks but costly valleys: The last huge biotech surge, in 1989 to 1991, was followed by a three-year period (from 1992 through 1.994) when biotech stocks leaked money, and the same could happen again.

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