WALL STREET Mutual fund investors: Gear up, with caution

Investors chasing the market's recent gains are probably too late.
NEW YORK (AP) -- With Wall Street rallying for more than three months, stock fund investors are feeling more bullish. Funds with positive returns far outnumber those with negative returns, and riskier funds, including those that focus on growth or technology stocks, are outpacing bearish havens like gold funds.
Investment experts agree it's time for mutual fund investors to be more aggressive -- yet careful.
"I think caution should still be the word of the day," said Ralph D. Scearce, a financial planner in Lexington, Ky.
Overvalued market
Scearce is concerned that the stock market is overvalued, with the Standard & amp; Poor's 500 index, the broadest of Wall Street's major indexes, having risen about 30 percent since mid-March to reach levels of a year ago. Stocks in the S & amp;P are trading at more than 30 times earnings, which planners like Scearce say is too high, given the fact bull markets historically have started with stocks trading at 12 times earnings.
"I believe we had the greatest [market] bubble in the history of mankind between 1995 and 1999, and I don't think we are going to get through that bubble in three years," Scearce said.
Still, there's plenty contributing to investors' upbeat mood. Each of the 25 largest stock funds have positive returns so far this year, 20 of them in the double digits, according to Lipper Inc. The three biggest gainers of this group are: the Nasdaq-100 Trust, with a year-to-date return of 24.9 percent; American Funds Growth Fund of America, A shares, with a return of 16.4 percent; and Vanguard Windsor II, with a return of 16.1 percent.
Equity encouragement
Another encouraging sign can be found in the 41 categories of equity funds that Lipper tracks. Of those categories, all but two have positive returns so far this year. And the two that don't are the type that fare best in bear markets -- gold funds, with a negative year-to-date return of 0.5 percent, and specialty equity diversified funds, with a negative return of 5.8 percent, according to Lipper.
Fund investors' old favorites, the tech and growth funds that ruled the '90s bull market, are back on top. Health/biotechnology funds have a year-to-date return of 23.6 percent, while small-capitalization growth funds have a return of 18.3 percent, according to Lipper.
Yet, financial planners and other experts recommend fund investors continue with caution. After all, if they are looking to chase the market's recent stellar returns, chances are they're too late, said Eric Tyson, author of "Mutual Funds for Dummies."
"The screaming bargains that were out there are no longer there. The easy money has been made," Tyson said. "I am still bullish about the long term, but people can't expect to buy now and see the market go straight up."
Tyson recommends investors make more moderate moves rather than turning their fund portfolios over to riskier, high-growth sectors.
Investors, for example, might consider increasing their contributions to their 401(k) accounts or individual retirement accounts.
Be sure to diversify
And, Tyson said, investors should look to diversify their holdings, making sure they have money in both stocks and bonds, companies of varying size as well as companies based in the United States and abroad.
"Keep a diversified portfolio. Those investors who did [during the three-year bear market] fared better than most," Tyson said. "Those who had a 50-50 split between stocks and bonds probably didn't lose money."
Scearce, the planner in Kentucky, recommends investors focus on value-oriented ones funds, which concentrate on safer blue-chip companies that often pay dividends and typically hold up better when the economy is wobbly.
Another reason that value-oriented funds deserve attention is because of the recent dividend tax cuts. As part of the 10-year, $350 billion package of cuts, signed into law by President Bush last month, stock dividends will be taxed at a maximum rate of 15 percent from 2003 through 2008. Previously, dividends were taxed as ordinary income at rates as high as 38.6 percent.
In 2009, dividend taxes return to the rates paid on ordinary income with the high rate being 35 percent, but some market analysts believe Congress will decide to extend the cuts.
Paul Merriman, president of Merriman Capital Management in Seattle and publisher of FundAdvice.com, recommended that investors, before making big fund purchases, identify their goals and determine the rate of return they deem necessary to reach them.