Investors who exclusively use broadly diversified, no load mutual funds for their stock investments often lose out on opportunities to increase the reward potential of their portfolios. This article looks at two methods investors may use to enhance the performance of their portfolio of diversifed, no load mutual funds.
Diversify, diversify, diversify!
Rebalance your portfolio periodically.
These have become the mantra in the post dot-com era. Stocks, bonds, and cash typically form the major asset classes for constructing portfolios of no load mutual funds. Lot of emphasis rightly gets placed on the percentage of assets allocated to no load mutual funds of different asset classes. However, the division of assets within a particular class does not nearly get the attention it should.
All too often, investors exclusively use broadly diversified, no load mutual funds for their stock investments. Fidelity Magellan Fund (Nasdaq: FMAGX) and Fidelity Contrafund Fund (Nasdaq: FCNTX) are examples of popular Fidelity funds investors commonly use. By following this approach, investors often miss out on opportunities to enhance the reward potential of their portfolios.
In a related article, we have looked at how investors can use sector funds to construct a diversified, no load mutual fund portfolio. In this article, we look at how investors can use sector funds to enhance the performance of their portfolio of diversified, no load mutual funds. Although Fidelity funds are presented as examples, the concepts outlined here can be implemented using sector funds managed by other institutions such as Vanguard or T. Rowe Price.
Sector funds confine their investments to a particular sector of the economy. Fidelity funds managed under the Select Portfolios? are sector funds. For example, Fidelity Select Energy (Nasdaq: FSENX) is a no load mutual fund that focuses its investments on various segments of the energy industry such as integrated oil companies, oil and gas exploration and production companies, and oil field service companies.
So how does one use sector funds to increase the performance potential of a portfolio of diversified, no load mutual funds?
Focus on sectors with growth opportunities. An investor having a portfolio of diversified, no load mutual funds may commit a portion of her assets to sector funds that focus on areas having significant growth opportunities, e.g., electronics or software. Some financial professionals call this the 'core and satellite' portfolio approach where the diversified, no load mutual fund is the core and the sector fund is the satellite holding. Investments in Fidelity funds like Fidelity Select Electronics (Nasdaq: FSELX) or Fidelity Select Software and Computer Services (Nasdaq: FSCSX) can enable the investor add emphasis on growth sectors such as electronics and software, respectively.
Take a proactive approach to sector investing through sector rotation. Like in the previous case, an investor having a portfolio of diversified, no load mutual funds commits a portion of her assets to sector funds. With this approach, the investor however seeks to maximize the potential of the portion of assets committed to sector funds by periodically switching assets into sectors with higher expected returns.
For example, until not too long ago, major corporations pruned technology related capital spending whereas falling interest rates kept consumer spending strong. To profit from such secular trends, an investor may choose to invest in Fidelity funds such as Select Consumer Industries (Nasdaq: FSCPX) and Select Leisure (Nasdaq: FDLSX) while avoiding Select Technology (Nasdaq: FSPTX). alphaprofit.com's research indicates that sector rotation has the potential to outperform the market averages on the basis of relative returns as well as risk-adjusted returns. To employ this approach effectively, you need to understand and follow the dynamics of the individual sectors. You must also be able to make informed decisions on sectors to select and sectors to avoid.
The Impact on Your Portfolio. Strong performance from a portion of assets committed to sector funds can materially enhance the return of your portfolio of no load mutual funds. Fidelity funds such as Select Electronics and Select Software and Computer Services sport 10 year average annual returns of close to 18%; this is nearly twice the 10 year average annual return of 9.4% for the Fidelity Magellan Fund. Using tactical, infrequent rotation of assets among sectors, the AlphaProfit's Focus? model portfolio has increased at an average annual rate of 34.4% since 1993.
So what do these return rates translate to you in dollar terms? A $100,000 investment in a diversified, no load mutual fund that grows at 10% per year results in $259,374 at the end of 10 years. If the same $100,000 is divided such that $85,000 is invested in the same diversified, no load mutual fund growing at 10% per year and the remaining $15,000 is invested in sector funds growing at 30% per year, the assets will total $427,256 at the end of 10 years. That is $167,882 or 65% more than the $259,374 resulting in the former case.
Thus by allocating even a relatively small, say 15%, of the total portfolio of no load mutual funds to sector funds, you can dramatically increase your returns.
Key Points to Remember
1. Investors who exclusively use broadly diversified, no load mutual funds for their stock investments often miss out on opportunities to enhance the return of their portfolios.
2. Sector funds can serve as a valuable return enhancing booster for an investor owning a portfolio of diversified, no load mutual funds.
3. Investors may choose to take a passive long-term approach to investing in sector funds that target high growth sectors of the economy. Alternatively, an investor can take a proactive approach to maximize the potential of sector funds by periodically switching assets into sectors with higher expected returns.
4. Investors willing to look beyond broadly diversified, no load mutual funds have a powerful ally in sector funds. Such investors can materially increase portfolio returns by committing a relatively small fraction of their total assets invested in diversified, no load mutual funds to sector funds.
Notes: This report is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. This report does not have regard to the specific investment objectives, financial situation, and particular needs of any specific person who may receive this report. The information contained in this report is obtained from various sources believed to be accurate and is provided without warranties of any kind. AlphaProfit Investments, LLC does not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. AlphaProfit Investments, LLC is not responsible for any errors or omissions herein. Opinions expressed herein reflect the opinion of AlphaProfit Investments, LLC and are subject to change without notice. AlphaProfit Investments, LLC disclaims any liability for any direct or incidental loss incurred by applying any of the information in this report. The third-party trademarks or service marks appearing within this report are the property of their respective owners. All other trademarks appearing herein are the property of AlphaProfit Investments, LLC. Owners and employees of AlphaProfit Investments, LLC for their own accounts invest in the Fidelity Funds mentioned in this report. They may for their own accounts also buy, sell, or hold long or short positions in any of the other securities mentioned in this report. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from Fidelity Investments. The investment returns and examples provided above are solely for illustrative purposes. Past performance is neither an indication of nor a guarantee for future results. No part of this document may be reproduced in any manner without written permission of AlphaProfit Investments, LLC. Copyright ? 2004 AlphaProfit Investments, LLC. All rights reserved.
About The Author
Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfit Investments, LLC. Sam developed the ValuM? Investment Process for managing investments. He edits the AlphaProfit Sector Investors' Newsletter?. For the 5 year period ending December 31, 2003, AlphaProfit model portfolios increased by up to 288%, a compound annual return rate of 31%. To learn more about AlphaProfit and to subscribe to the FREE newsletter, visit: alphaprofit.com
executive chauffeured services Bradford .. Madison to Airport carThe stock market has not been very kind to your... Read More
We have two candidates for president that have really different... Read More
How often have you come across an advertisement or e-mail... Read More
Time to look back2004 is over, now we are in... Read More
This is the continuing story of our two imaginary traders,... Read More
As an investor you will want to check out any... Read More
Let's hope you did not have any of the Enron... Read More
If there is one term over-used when talking about making... Read More
Question: How does it get better when it gets worse?Last... Read More
The date October 13, 2000 will forever be embedded in... Read More
You read and hear a lot about hedge funds. Unfortunately,... Read More
What does it take to be a stock trader? It... Read More
You have a lock on your house. You have a... Read More
The spring-loaded rat catcher is the ultimate low-tech device invented... Read More
A colleague of mine just returned from a scuba diving... Read More
Mutual funds and brokers are always preaching not to buy... Read More
It has fallen upon the consumer to make our economy... Read More
What is leverage?Here is a definition of leverage from an... Read More
On Friday or Saturday evening my wife gets a movie... Read More
The gleam and bright lights of Wall Street lure in... Read More
One of the most believed bits of conventional wisdom from... Read More
Stock trading can be a very profitable activity. You can... Read More
I am hearing predictions by brokers, financial planners, talk show... Read More
I constantly hear the talking heads on CNBC-TV, the radio... Read More
If you've ever flipped on the television to CNN Financial... Read More
O'Hare Chicago prom limo ..If you have not back tested your trading system, you... Read More
Starbucks earnings are up again and so is their stock... Read More
Economists know more about how the fragments of society work... Read More
If you have been watching the stock market at all... Read More
The Dow Theorycharles h. dowcharles h.... Read More
If you have been dealing with mutual funds for any... Read More
The stock market has not been very kind to your... Read More
Before you embark upon a journey of trading stocks or... Read More
On Monday, November 25, 2000 Investor's Business Daily listed on... Read More
The Shadow knows. Remember him? It seems a shadow has... Read More
Before you buy another car you walk around the lot,... Read More
I am hearing predictions by brokers, financial planners, talk show... Read More
Wall Street has been preaching the doctrine of Buy and... Read More
During our travel down life's path we come to many... Read More
What does it take to be a stock trader? It... Read More
It is difficult to make money in a bull market,... Read More
What does it mean to short a stock?This means that... Read More
Right now there doesn't seem to be any "gold fever".... Read More
When is a dividend not a dividend?The latest thing "conservative"... Read More
Several times each month I am solicited by various market... Read More
Forget making a profit; instead focus on the income provided... Read More
After some forty years of banking and investments, I retired... Read More
When you become interested in a stock or mutual fund... Read More
You probably know the story of Sherlock Holmes and the... Read More
How is it possible that trash Companies are posting less... Read More
Stocks & Mutual Fund |