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Heavy Metals: One Sector Fund Group You Don't Need to Buy

Also, a reader's opinion on sector fund rotation.

If you think of yourself as someone who invests for the long term -- say more than three months -- you don't want to buy gold or metals funds.


While these funds can experience short run-ups, that's no reason to buy one.

Over longer periods of time, they produce dreadful returns and don't belong in your portfolio.

Gold and precious metals funds tend to do well during times of inflation or when inflationary fears surface.

Inflation means that prices for goods and services are rising. And as prices rise, your dollar buys less and less. The thinking is that hard assets like gold and other metals will retain their value when prices are going up.

In August, for example, precious metals funds climbed 7.1%, compared with a 6.2% rise for the

S&P 500

index, according to



But just look at the long-term results for these funds. The average precious metals fund has a five-year annualized return of -- 14.6% -- the worst of any stock-fund group. And don't expect the future to be any better for gold and metals funds.

Nowadays, investors have other instruments, like real-estate funds, to hedge against inflation. Plus, the long-term outlook for gold and metals stocks is decidedly grim.

These are capital-intensive businesses in an area where demand is stagnant or shrinking. Central banks are continuing to wean themselves off the gold standard, which further reduces the need for this commodity.

"This is a sector that 99.9% of the investing public should avoid," says Kelli Stebel, a fund analyst at Morningstar.

For these stocks to come back with a vengeance, a new widespread use for gold would need to be found. Or maybe a protracted bear market would help, Stebel adds.

To get a good indication of where you money should be, just look at the sectors or industries that dominate broad stock-market indices like the S&P 500 or the

Wilshire 5000


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You should have exposure to technology, health care, finance, energy and utilities.

You can forget about gold and precious metals unless you're planning to buy some jewelry.

And Now a Word From a Trader

Yesterday's column warned against trying to trade sector mutual funds.

Rotating your money from sector to sector doesn't work for most people. To successfully bet on the fluctuations of various industries, you have to be willing to buy a sector when it's down and sell when it's up. You could also give away a lot of your money to commissions and taxes.

Nevertheless, I did hear from some investors who say they know how to trade funds successfully.

"Among the many points that I dispute in your article is that you have to buy at the bottom and sell at the top to trade sector funds," says reader

Jim Harper

. "I buy high and hope it goes higher. ... Several studies show a persistence of trends in sectors that last from days to years in length," Harper says.

"A leading sector fund family,


, actually encourages market-timing and trading."

These are good points, but in many ways they serve to bolster the argument for avoiding sector fund rotation. Since studies show that trends can last from days to years in length, timing them isn't easy.

Second, Rydex does encourage market-timing and trading, but the fund family is a bit out of the mainstream of the investing community. Most financial planners would suggest you apportion only a small amount of money into such a high-octane, rapid-turnover investment outlet.

In short, although some people can and do make money from rotating sector funds and a few fund families do cater to that type of strategy, most investors would be well-advised not to try this at home.

For one, no one with a full-time job outside the financial-services business, a family and other obligations has the time to devote to active trading.

With a mutual fund, you get a diversified basket of stocks with a single purchase. If you do the necessary research, you can buy a fund, hold it for years and make money.

You don't have to trade to do well. Investing doesn't have to be complicated.

Send your questions and comments to, and please include your full name.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.