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Danger of worsening recession drove Fed action- AP

Faced with the danger of a worsening recession, Federal Reserve policymakers at their March meeting took the bold step of plowing $1.2 trillion into the economy to drive down interest rates and entice Americans to start buying again.

• Pulte Homes agrees to buy Centex in $1.3B deal
• Housing deal, hope for insurers help stocks
• Treasury: GM, Chrysler launch supplier support
• Chrysler president: 30 days enough for Fiat deal
  

For most of us, investing in mutual funds has provided cold comfort during the market's downdraft.

Even the recent uptick in share prices hasn't done much to quiet the oft-told jokes about 401(k)s becoming 201(k)s.

Even though the market has been unkind, it's important to maintain vigilance when it comes to managing your mutual funds, whether in retirement accounts or in investment accounts. Here are four steps you should take to re-evaluate your fund holdings.

1. Stay Diversified

A lot of us red-lined the stock portion of our mutual-fund investing, whether in our retirement accounts or in other investing accounts. This meant we all eschewed the common-sense notion of diversification, which would have provided some downside protection when stocks fell sharply.

Last year, the total return for the Dow Jones Industrial Average was -32%, while Treasury bonds rose 13%. So you can see how a mix of stocks and bonds would have cushioned the blow.

Diversification should also include consideration of other asset classes beyond stocks and bonds. Financial advisers recommend that you own a small portion, somewhere between 5% and 10% of your riskier portfolio, in commodities. This can easily be accomplished through either a natural-resources mutual fund or an exchange-traded fund that focuses on commodities.

Commodities make sense for two reasons. First, they provide a hedge against inflation, which could become an increasing concern in an age of mammoth budget deficits. Also, commodities tend to trade differently than stocks, giving you another dollop of diversification.

A final piece of diversification is international exposure. Emerging markets are riskier than international funds that focus on the developed world, so bear that in mind when quantifying your risk profile. International exposure broadens the reach of your investments and also gives you the chance to benefit if the dollar weakens. When overseas gains are translated back into the U.S., a weaker dollar provides a "kicker" to performance.

2. Don't Double Down

While 401(k) plans are generally good for investors who are building retirement assets, they do have some pitfalls. Perhaps the biggest sin is taking too much advantage of investing in the company's stock through your 401(k).

Since you are already working at the company and drawing a salary, investing in the company stock through your retirement program is, in a form, doubling down.

If your company runs into trouble, you could lose your job and the stock you hold in your retirement account could lose some or all of its value. This took place in dramatic fashion when Enron imploded in late 2002. A lot of Enron employees not only lost their jobs but also huge chunks of their retirement when Enron stock became worthless.

3. Avoid Inertia

Two other common pitfalls have to do with inertia.

First, some folks never look at their 401(k), meaning that the investments remain in their default position, which in many cases is a money-market account. That looks like pure wisdom, in some respects, if you've started investing in the past few years.

But, that probably means you're on the younger side, and a money-market fund is not a long-term path to building retirement wealth. You should not ignore the need to develop and follow a diversified investment strategy.

Second, some people ignore their retirement investments once they have set them up. This is especially tempting during challenging times like now. But, it is always important to make sure that your strategy is intact.

With bonds outperforming stocks by such a wide margin in 2008, a lot of diversification plans got out of kilter. Rebalancing to maintain your strategy -- which often entails selling your winners and buying your losers -- helps to ensure that you don't chase last year's returns.

4. Watch Your Costs

In a market where every percentage gain is precious, keeping close tabs on your fees and taxes is more important than ever.

Index funds usually charge lower fees than actively managed funds. But many investors prefer to have a mix of index and actively managed funds. Fees among actively managed funds vary widely, so do some checking to make sure that you are using the lowest cost funds in the actively managed portion of your portfolio.

Along with fees, tax considerations are important. In your non-retirement portfolio, exchange-traded funds, for instance, have more efficient and predictable capital-gains tax implications.

Traditional mutual funds can distribute capital gains to holders at any time. Capital gains in an exchange-traded fund are generally only paid when you sell the fund. Fees for exchange-traded funds are also often lower than traditional mutual funds.

Dave Kansas is editor of FiLife and author of "The Wall Street Journal Guide to the End of Wall Street as We Know It.

By Peter A. McKay and Geoffrey Rogow

U.S. stocks were mixed Wednesday afternoon as a rally in insurance stocks was offset by more concern about what's to come this earnings season from companies and the economy.

Stocks were affected earlier by the release of minutes from the Federal Reserve's March 18 meeting. Officials were divided last month on just how much to ramp up purchases of mortgage and Treasury securities, although they eventually chose to pump more than $1 trillion into the economy.

Meanwhile, staff economists marked down their economic forecasts, with a slow recovery not expected until next year amid rising joblessness.

The Dow Jones Industrial Average was recently down 5 points to 7782 and the S&P 500 rose 5 points to 820, helped by a 1.4% gain for its consumer-discretionary components. The Nasdaq Composite Index, which has outperformed the other major indexes so far this year, was up 19 points to 1581.

In a volatile session that has seen stocks trade around the flat line for much of the day, insurers have paced much of the gains. The bulls sense the U.S. government is gradually cleaning up the mess left behind by the financial crisis, with life insurers who have suffered because of their mortgage bond and stock holdings becoming the latest beneficiaries of a methodical stabilization plan.

A Wall Street Journal report that the U.S. Treasury Department will make federal bailout money available for some struggling life-insurance companies helped rally those stocks. Hartford Financial Services Group stock rose 13% to $9.54, Genworth Financial rose 11% to $2.32 and Lincoln National was up 29% to $8.89.

Still, the broad spectrum of financials was lower, with those listed in the S&P 500 recently down 1.3%. Large banks were at the core of much of March's gains in stocks thanks to some better expectations, but few see the sector as ready to surge further.

"Financials are probably the only place where there is optimism in earnings right now, but we could see 7000 (on the Dow) in quick order if Citi or JPMorgan disappoint," said Kent Engelke, chief economic strategist for Capitol Securities Management.

Still, there were stock increases gains for some of the more beaten down sectors. For the ailing construction sector, gains were helped by Pulte Homes and Centex, which said they will combine in a $1.3 billion stock-for-stock deal that would create the nation's largest home builder. Pulte shares declined 12% to $9.57 while Centex rose 19% to $9. Some builders also bounced on the news - Lennar shares rose 5% to $7.46.

Largely, however, the market will be taking its cues from quarterly reports due in the coming weeks. Alcoa set off the first-quarter reports by posting a steep loss late Tuesday amid a plunge in aluminum prices. Shares of the Dow component were up 1.4% at $7.90 in recent trading.

Alcoa's miss Tuesday was an inauspicious start to the earnings season, and possibly a taste of what's to come, according to Schaeffer's Investment Research. In the 24 earnings seasons since 2003, the S&P 500 has had an average 21-day return of 0.97% on the 12 occasions that Alcoa topped expectations, and an average loss of 1.8% on the 10 occasions it fell short. Further, Schaeffer's found that the performance of the market during earnings season typically lags the average 21-day return.