Short-Term Fund Approach Will Not Weather Recession.

THERE'S enough recession talk in the air right now to spook the staunchest long-term investor in mutual funds.

Just about everything you hear implies, if it doesn't openly assert, that you ought to be doing something about this troublesome situation.

Switch to bonds. Go to cash. Buy "defensive" stocks. Investigate bear funds set up to rise when markets fall. Buckle up. Hunker down. Get out.

You could sprain something trying to follow all this contradictory advice. I'm here to argue that you needn't listen to any of it.

I say this assuming you're in stock and bond funds for the long haul, which is the only good way to be there. Trading funds short-term is like playing chess wearing mittens.

Let's also stipulate that if we get a recession, defined as a period of at least two quarters of declines in business activity, it will -- sooner or later -- end. Maybe it will be short, maybe it will be long. But unless it's going to break all precedents, it won't be forever. And should it somehow last forever, poor returns on our investments would most likely be the least of our worries.

"When you're flying across the country and you encounter turbulence in the air over Kansas, you don't bail out of the plane," said Christopher Browne, manager of the $925 million Tweedy, Browne American Value Fund, at an investment conference in San Diego the other day.

Timing trap

Any sudden move you might make to adjust for temporary trouble will amount to market timing, which over time has proved a tough way to make a buck.

Bonds? If you were going to catch a wave in the U.S. Treasury's 10-year bond, you should have climbed aboard a year ago, when you could have nailed down a yield of more than 65 percent -- rather than now, when it's barely above 5 percent. Of course, a year ago the stock market was cooking and nobody had much good to say about bonds.

On the brink of a recession, you wouldn't want to touch risky junk bonds. Yet the Bloomberg average of more than 500 high-yield bond funds has gained 4.6 percent in the first few weeks of 2001. So much for deciphering the bond-market cycle.

Cash? Returns on money funds are tumbling as the Federal Reserve cuts interest rates in the short-term credit markets. At last word from iMoneyNet Inc., the average taxable money fund's yield was down to 5.3 percent from 6 percent just a few weeks ago. Expect it to go lower still.

Bear funds? In 2000 the Rydex Ursa Fund, which bets against the market using such devices as stock-index futures, gained 17 percent, to rank in the top 10 percent of all stock funds. But in order to benefit from such moves, you have to know when to get in and when to get out again, which is a tall order.

Looking ahead

"The stock market anticipates. It will discount an economic recovery before there is any evidence of it," said Howard Ward, manager of the $3.8 billion Gabelli Growth Fund, who also spoke at the conference here, put on by the discount brokerage TD Waterhouse Group Inc.

Few conventional stock funds attempt to cushion market declines by increasing their cash reserves. Most managers long ago concluded that they had no hope of success as market-timers, and opted to stay fully invested all the time.

Suggestions to look for funds that do well coming out of recessions are equally dubious. Lately, I've seen it argued that small-stock funds, value funds, financial-stock funds and even tech-stock funds are good post-recession investments. Since every recession is different, none of these patterns offers a whole lot to rely on.

The other approach, the old-fashioned one, looks mindless at first -- simply continuing with a long-term plan of regular investing, ignoring the commotion around you as much as you can.

To do this actually may require great strength of mind. "Investing is counter-intuitive," said Ward. "We have to keep forcing ourselves to do things that are uncomfortable."

Probably the simplest investment advice ever given is to buy low, sell high. Well, the chance to buy low comes when the case for buying doesn't look so strong -- such as when everybody's worried about a recession.

Chet Currier is a columnist for Bloomberg News.

Mutual Fund Investors' Vocabulary List

In a recent conversation, somebody reminded me that people who cash in mutual fund investments do not "sell" fund shares.

Selling is what you do to unload a stock, bond, futures contract, Sammy Sosa rookie card or any other investment that is traded in a continuous market.

Mutual funds are not continuously traded. They issue new shares directly to each investor who places a buy order, and buy shares back directly whenever an investor asks out. The latter procedure is called redeeming.

If you want to speak with authority, it's important to know such things. "I'll tell you how we can afford one of those new Ford Thunderbirds," you say to your spouse. "With a mutual fund redemption."

There are countless ways to enrich your life through a better personal-finance vocabulary. If the example I just gave didn't fit your situation, here are several others:

Hold: When they, evaluate stocks or stock funds, most analysts don't use the word "sell" either, for fear of provoking the pooh-bahs at the company or fund in question.

Load: Though people in mutual fund land have devised many ways to charge a commission, the c-word is rarely used in connection with funds. In the old days, when the sales charge was routinely collected up front, it acquired the surprisingly blunt name "load."

Nowadays commissions take a half-dozen different forms -- for instance, the contingent deferred sales charge ("back-end load") collected when you redeem. It varies in size depending on how long you've owned the shares.

Closed: A closed mutual fund is not the same thing as a closed retail store or bank branch. Funds that "close" to newcomers customarily remain open to new purchases by existing shareowners; by members of employer-sponsored 401(k) retirement plans in which the fund is included; and by new customers of financial planners who have previous dealings with the fund.

Chet Currier