Smarter Money: Don't Get Sucked In by Sector Mania

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The mutual fund industry is pushing too hard on sector funds. The industry's doing wrong by you. The lesson of last year was that a sector fund, particularly a tech sector fund, doesn't provide enough diversification to merit your investment.

This week the Fund Junkie (Ian McDonald), who may be the best funds reporter in the country, wrote a terrific piece about the promotion of sector funds and wondered aloud whether it was right. I don't have to wonder. I know it is wrong. I know it is wrong because sector is really a code name for technology and at this moment I can't think of anything worse than a basket of technology stocks as a method of investment.

Don't get me wrong, I like technology for the ultimate future. I think it should be in your portfolio. But this ad push makes it sound like it should be your portfolio. And that's what's ill-considered. Right now, tech is undergoing one of those massive revaluations downward that I have seen other sectors go through after they peaked. Each time, the sector funds tried to attract attention to these groups after they have peaked. There was a massive push for oil and gas sector funds after the early '80s boom. We saw a food products sector push after the mid '80s consolidation. And we saw a pollution control sector fund sponsorship after that sector peaked in the late '80s. People lost fortunes in each.

It is funny, you take one look at the Fidelity Sector Fund book and you will see the remnants of previous sector funds created to take advantage of demand of previous manias. It's doubly painful right now in tech because while some tech companies are doing well, most are doing poorly, inviting the possibility of a second year of terrible underperformance. That's precisely why a diversified group of stocks or a balanced fund makes so much sense.

Ultimately I look at investing as if it were clothes; some suits never go out of style. Others seem really stupid two or three years later. Diversified funds are classics; sectors are fads. Don't get caught in one.