Raising Your Investment Returns

Raising Your Investment Returns

When it comes to stock investments, investors who rely solely on broadly diversified, no-load mutual funds may miss out on possibilities to boost their portfolios' potential returns. This article discusses two strategies that can help investors get the most out of their no-load mutual fund portfolio.

Invest in a wide variety of things!

Occasionally, you should rebalance your investments

In the post-Internet era, these words have become ubiquitous. Portfolios of no-load mutual funds are typically constructed using stocks, bonds, and cash. There is a lot of focus on the asset allocation of no-load mutual funds, and rightfully so. However, the allocation of resources within a given group does not receive nearly as much consideration as it should.

A common practice among stock investors is to put all of their money into low-cost, diversified mutual funds. The Fidelity Magellan Fund (Nasdaq: FMAGX) and the Fidelity Contrafund Fund (Nasdaq: FCNTX) are two of the most well-known funds offered by the firm. When investors take this tack, they risk missing out on opportunities to boost their portfolios' potential returns.

In a recent piece, we discussed the ways in which investors can use sector funds to assemble a diversified mutual fund portfolio that incurs no load. In this piece, we explore how no-load, diversified mutual fund investors might benefit from sector funds. Although Fidelity funds are used to illustrate the topics discussed here, other institutions' sector funds, such as those managed by Vanguard or T. Rowe Price, can be used instead.

The investments of sector funds are limited to that sector only. The Select Portfolios funds handled by Fidelity are specialized investment vehicles. Integrated oil firms, oil and gas exploration and production companies, and oil field service organizations are just some of the types of companies that the no-load mutual fund Fidelity Select Energy (Nasdaq: FSENX) invests in.

So, how does one maximize the return potential of a diversified, no-load mutual fund portfolio by adding sector funds?

Pay attention to industries with room for expansion. An investor with a diverse portfolio of no-load mutual funds may choose to allocate a portion of her capital to sector funds that specialize in industries with high development potential, such as electronics or software. An example of this is the "core and satellite" portfolio strategy, in which a diversified no-load mutual fund serves as the "core" holding and a "satellite" sector fund rounds out the portfolio. By allocating capital to Fidelity funds like Fidelity Select Electronics (Nasdaq: FSELX) and Fidelity Select Software and Computer Services (Nasdaq: FSCSX), investors can accentuate their exposure to dynamic industries like electronics and software.

Use sector rotation to take a preventative stance on your investment strategy. A similar scenario occurs when an investor who already has a diverse portfolio of no-load mutual funds allocates some of her holdings to sector funds. However, the investor's goal in this strategy is to increase the return on investment (ROI) from the money that is allocated to sector funds.

Large companies, for instance, reduced spending on technology-related capital expenditures until recently, but consumers' spending remained robust thanks to dropping interest rates. To capitalize on these long-term tendencies, investors may want to steer clear of the Select Technology (Nasdaq: FSPTX) fund offered by Fidelity and instead put their money into the Select Consumer Industries (Nasdaq: FSCPX) or Select Leisure (Nasdaq: FDLSX) fund. According to data compiled by AlphaProfit.com, sector rotation has the potential to provide higher absolute and risk-adjusted returns than the market as a whole. To successfully implement this strategy, you must be familiar with and attuned to the dynamics of the many industries. You should also have enough knowledge to pick and choose which industries to invest in and which to avoid.

Effects on Your Investment Portfolio If your no-load mutual fund portfolio includes some money invested in sector funds and those funds perform well, your overall return could be significantly increased. The Fidelity Magellan Fund has returned 9.4% annually on average over the past decade, whereas the Fidelity Select Electronics and Select Software and Computer Services funds have returned close to 18% annually. AlphaProfit's Focus model portfolio has gained at an annualized rate of 34.4% since 1993 because of strategic, occasional asset rotation across sectors.

How much money are we talking about when we talk about these rates of return? Ten years after putting $100,000 into a no-load, diversified mutual fund, the investor would have $259,374. After 10 years, you'll have $427,256 if you invest the same $100,000 in a diversified, no-load mutual fund that grows by 10% annually and invest the remaining $15,000 in sector funds that grow by 30% annually. That's 65% more than the $259,374 we got before, or $167,882 more in total.

So, even if you only invest 15% of your whole no-load mutual fund portfolio in sector funds, you'll see a significant improvement in returns.

Important Considerations

Stock investors who rely solely on low-cost, diversified mutual funds may be missing out on ways to boost their portfolio's return.

Second, an investor with a diverse, no-load mutual fund portfolio can benefit from adding sector funds as a way to increase their returns.

Third, investors in sector funds targeting strong growth areas of the economy may choose a passive, long-term strategy. Alternatively, a proactive investor can make the most of sector funds by rebalancing their holdings on a regular basis towards sectors with greater predicted returns.

Those prepared to expand their investment horizons beyond no-load, diversified mutual funds will find sector funds to be a valuable resource. Investors in diversified, no-load mutual funds can significantly boost portfolio returns by allocating a modest portion of their holdings to sector funds.

This material is intended solely for educational and research purposes. This article is not intended as investment advice or as an offer to purchase or sell securities. No individual's investing goals, financial position, or special needs have been taken into account in the preparation of this report. This report contains material that has been gathered from a number of reliable sources, but no guarantees are made as to its accuracy. You should not rely on any of this material, including information provided by third parties, because AlphaProfit Investments, LLC, does not guarantee its accuracy or completeness. Any mistakes or omissions herein are not the fault of AlphaProfit Investments, LLC. 

All opinions are those of AlphaProfit Investments, LLC, at the time they were written and are subject to change at any time. Any damage, whether direct or indirect, that may result from using the data presented in this report is not the responsibility of AlphaProfit Investments, LLC. All trademarks and service marks of third parties used in this article are the sole property of their respective owners. AlphaProfit Investments, LLC is the owner of all other trademarks used herein. The Fidelity Funds discussed here are held by the owners and staff of AlphaProfit Investments, LLC, in their own accounts. They may invest in, or hedge against, any of the other securities discussed in this report for their own accounts. 

Fidelity Investments is not affiliated with or compensated by AlphaProfit Investments, LLC in any way. Examples and hypothetical returns on investments used above are for demonstration purposes only. Success in the past is not a predictor of success in the future. Without the express written consent of AlphaProfit Investments, LLC, you may not copy, distribute, or otherwise use any portion of this material. All content (c) 2004 AlphaProfit Investments, LLC. All rights reserved. Legally, that is.