Post #97 - Sector Fund Investing (Bad Advice)

Post #97

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

Sector Fund Investing – Bad Advice
Sector funds (and ETFs) own stocks in one specific industry, or sector.  Buying a sector fund means you are betting that this specific industry will do better than the market as a whole.

I recommend that you own the Vanguard REIT fund, which invests in the commercial real estate sector.  Not because I think real estate will outperform the rest of the market.  Own it because commercial real estate does not move up or down in lock step with other equity asset classes.  Modern Portfolio Theory tells us that this will decrease the overall volatility of your portfolio, which means it reduces risk.  That’s why I want you to own the Vanguard REIT Index Fund.  REITs should be 10% of your portfolio.

Admittedly, owning real estate during the last year and a half has been a very painful experience.  What can you do?  Take your lumps and keep your positions.

You must own the REIT fund for as long as you own your other funds.  You are not speculating in commercial real estate.  You are long term investing in commercial real estate.  There’s a big difference.

Do You Need a Sector Fund?

Are there any sectors besides real estate that you might want to own for the next forty years?  I don’t think so.  But who says I’m the smartest guy in the world?  Some experts will tell you that commodities are an important sector to own.  “Commodities” is a general term that includes gold, silver, wheat, rice, crude oil, things like that.  I have no problem if you commit 5% of your portfolio to commodities.  It will be difficult to find one fund that invests in both agricultural and non-agricultural commodities.  You may need to own two funds. 

I don’t think you need to own commodities, but if you do your own research and decide you want them, go ahead.  As I said, I’m not the smartest guy in the world.  And I don’t think that it will hurt you a lot to own them.

Most people screw up when they invest in sector funds.  They decide that energy will be hot for the next year or two.  They buy the energy sector fund.  Then they decide that health care will be hot.  So they switch from energy into health care.  Then they decide real estate is the next big thing, and they make another switch.  This is absolutely the worst thing to do, unless you can predict the future.

So, buy commodities if you are convinced that the sector will give your portfolio diversity without increasing the risk.  Hold the commodities as long as you hold your other Vanguard funds. 

You are a long term investor.  Not someone who guesses which sector will be hot next year.

Comments

[Penny Stock Investing]

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