When to own a sector fund?

[disneysteve]

One thing I wanted to write was DisneySteve said he didn't have much in his precious metal fund.

You see. . .I think that's what JimOhio and I kind of allude to about playing sectors, etc.

If you are going to make a play. . .make a play. . .I mean, what's the point of putting 5% of your portfolio somewhere unless you get some extreme leverage (like options or futures)?

I should have explained that. Trust me, I wish I had more in that fund. The reason I don't is because DW is no longer at that job so she's no longer contributing to the 403b plan. What is in there now is all there will be. I will eventually roll it over into her IRA, but I saw no reason to do that while the fund was doing phenomenally well, even though it is not much money.

[jIM_Ohio]

Now, you see, I find that fascinating - as you accumulate more wealth, you take on more risk.

I would rather overplay a sector when I am at 5 figures in assets than when I am at 6 figures.

I figure, okay. . .if I put 20-30K into a sector and I have a portfolio of about 90K. . .what's the worst that can happen? 2 years of -20% returns?. . .that's about a $12,000 loss.

Now. . .let's say I have a portfolio of 500K.

I put 100K into a sector. . .and now I get 2 years of -20% returns. . .well. . .that's about $36,000 in losses. My 100K is now worth 64K. I have some explaining to do to the DW. ("Um, honey. . .we have to talk about our latest statement from Janus. . ." LOL)

There's something psychological about that (although not entirely beyond my risk tolerance).

If I make $5000 when I had $50,000, that is a big deal.
If I make $5000 when I had $500,000, something is wrong.

So as you obtain more assets, the goal is to make more money- even a higher percentage return- than you did before. If the goal is accumulation, and the underlying goal is key.

Once I accumulate enough to where I have different known goal -like retire in 5 years with an 8% return from year 1 to year 5, ratcheting down the risk a notch or two or three becomes as important (to avoid a -20% loss).


So if I have $500,000 and I need $750,000 to retire is a different situation than if I have $500,000 and need $1.5 M to retire.

And if I have $150,000 and need $1.5 M to retire, I don't have the assets to take risks with 33% of that money (assumine that 33% is 11% here, 11% there, and 11% somewhere else) without getting hit with account minimum fees. While also maintaining an asset allocation. It was tough maintaining asset allocation to get from 0 to 160k. Now that I have a good base, I want to keep my asset allocation and take on more risks.

There are economies of scale with a larger asset base (from account fees to investment minimums in certain funds). Plus I want to use one brokerage (T Rowe Price) for example, and at 100k I get certain discounts (my account with them is just under 100k now in 2008), plus the fund minimums at their brokerage are 5k for some of the funds I want to use (PRPFX for example) even though that fund's real minimum is 1k.

[jIM_Ohio]

Aw, come on Jim.... Are indexers really that blasphemous? Because, as much as I hate to have to point it out, to describe any particular group as "deaf" and "pornographic" simply because they run contrary to your beliefs seem like... trolling. Nor is there any productive value to be gained by engaging in this tangent. So... you've got me stumped about what to say... other than to ignore it....

As for the debate regarding sector fund itself, well, is there one? It seems like we agree....

I did not mean to insult, my point was sometimes I see indexers using logic which makes 1+1=3 or 1+1=100 depending on what they want to prove... not on this board as much, but my apologies regardless.

[jIM_Ohio]

I should have explained that. Trust me, I wish I had more in that fund. The reason I don't is because DW is no longer at that job so she's no longer contributing to the 403b plan. What is in there now is all there will be. I will eventually roll it over into her IRA, but I saw no reason to do that while the fund was doing phenomenally well, even though it is not much money.

Generally speaking, when accumulating, having a handful of funds makes sense, and diversification might be more asset class based (small-mid-large-intl'l) and sector based (tech vs healthcare).

In general, when preserving assets is more important, more funds will be needed which invest in much different things. Bonds-domestic, foreign, government and corporate. Commodities. Cash. Equities (but maybe drop that tech holding), real estate.

My argument would be if you did too much of the latter when you accumulated, you are over diversified with little side benefit. My argument if you did the former will preserving is you are taking on too much risk.

[zetta]

Now, you see, I find that fascinating - as you accumulate more wealth, you take on more risk.

I would rather overplay a sector when I am at 5 figures in assets than when I am at 6 figures.

I figure, okay. . .if I put 20-30K into a sector and I have a portfolio of about 90K. . .what's the worst that can happen? 2 years of -20% returns?. . .that's about a $12,000 loss.

Now. . .let's say I have a portfolio of 500K.

I put 100K into a sector. . .and now I get 2 years of -20% returns. . .well. . .that's about $36,000 in losses. My 100K is now worth 64K. I have some explaining to do to the DW. ("Um, honey. . .we have to talk about our latest statement from Janus. . ." LOL)

There's something psychological about that (although not entirely beyond my risk tolerance).

Once you get to a larger portfolio, you wouldn't put such a large percentage into a sector play. With a 100k portfolio, a 20k play is 20% of your portfolio. With a 500k portfolio, a 20k play would only be 5%. You can afford to invest in riskier things because the bulk of your portfolio is in less risky investments.

[scfr]

Once you get to a larger portfolio, you wouldn't put such a large percentage into a sector play. With a 100k portfolio, a 20k play is 20% of your portfolio. With a 500k portfolio, a 20k play would only be 5%. You can afford to invest in riskier things because the bulk of your portfolio is in less risky investments.

Correct. Once again referring to the Couch Potato strategy:

Put Sloth to Work for You - Registered Investment Advisor

By the time you get to the 6th Block where you add a sector fund, you only have 16.67% of your portfolio in each fund.

Please note that he does not suggest buying a sector fund first, but sixth, after you have built a solid base of other funds.

BTW, I brough up the Scott Burns plan because I think he appeals to indexers ... but also appeals to non-indexers, especially as you get higher up in the blocks.

I do not follow his plan, but I think he has very interesting, well thought out ideas.

[Broken Arrow]

I did not mean to insult, my point was sometimes I see indexers using logic which makes 1+1=3 or 1+1=100 depending on what they want to prove... not on this board as much, but my apologies regardless.

Hey, it's all Kool & the Gang.

Although, I think just about any groups out there are prone to faulty logic, indexers or otherwise....

In fact, the one group I worry the most about is ME.

Because, in the end, that's what is important in my situation, whether I am making any serious mistakes with my money or not.

[sweeps]

What is it with the indexer bashing?

People invest in index funds because they like to take emotion, gut instincts and lucky (or unlucky as is often the case) guesses out of investing. And they definitely don't want to pay for someone's emotions, gut instincts and guesses -- which at least half the time turn out to be dead wrong.

Indexers believe that while the overall stock market goes up, one cannot reliably predict what will happen with individual stocks. Who could've predicted, for example that Google would've gone from ~$100 up to ~$750 and then back down to ~$450. Anyone who did predict such a swing was one word: lucky.