Don't Try Trading Mutual Funds at Home

If sectors are so important to successful stock trading, how about trading sector funds?

A fellow who used to work at Fidelity emailed me after my series on sector funds and told me that he knew someone who made 50% a year over the past five years simply by rotating from one hot sector to another.

Is it a good idea?

I say, unequivocally, that mutual funds are simply not for trading. Sure there will be the smart so-and-so who games them correctly. But mutual funds are to be bought and held.

In fact, after you have done your due diligence, I wouldn't switch funds unless a manager had a couple of bad years in a row. I have tinkered at times with selecting stocks because a hot sector can be expected to get in more money. But it is a dicey trade. Biotech, for example, had a great last quarter. So you can expect that it will get more money in.

That, however, isn't any way to invest. You are simply playing flow of funds. It is too easy to lose money that way.

The way I would use sector funds is to make a long-term bet on a sector: electronics or health care or oil, if I thought there was going to be a multiyear move in a group.

To trade in and out of them as if they were stock, to me, is a very dangerous game. I wouldn't attempt to do it at home.