The seduction of investing in hot sectors can be like the mermaid's siren call. Just ask investors who couldn't resist the temptation to put all their money in technology. The pressure was too great -- cocktail party stories, office comrades, Everest-like charts on
, all saying you should put your money in tech and make a killing.
Now with some technology stocks down as much as 60% to 80%, reality is hitting hard. After I appeared on
a few weeks ago, I received several calls from viewers. Never have I heard more heartbreaking stories. These were sincere, intelligent, talented, hard-working people. They had one thing in common: They put it all on red, and the ball didn't land where it was supposed to.
Of course, the game isn't over, and Joe Battipaglia of
yesterday he expects the
to top 5500 by year-end. I pray he's right, because it has become a nightmare for some investors.
Just 10 days after the wipeout of April 14, an attorney called me from the Midwest. He was managing about $450,000 of family money and was on margin for another $200,000. He said, "Vern, I had it all in technology and a lot of it was in Internet stocks. I thought I knew what I was doing. How could I go wrong with
? These are great companies and leaders in tech and on the Internet. But Vern, I've lost about 70% of all I've got. What can I do?" His wife was in the background, yelling at him like he'd just spent a drunken, compromising night on the town. She might have been right about the intoxication, but it wasn't booze, it was tech stocks. And he isn't alone.
In fact, most of us want to be on board the right train when it leaves the station. But the market doesn't have a predictable timetable, so it's a little harder to get the right times for the departure or arrival of something as challenging as a sector.
Sector funds are like the special teams in a football game. They have a specific purpose and they can help raise the score, but they are not the whole team or the whole game.
As I've said many times before, in a mutual-fund portfolio, it is always best to start with proven core managers. Managers like Bill Fries of
Thornburg Value, Chris Davis of
Selected American Shares, Glen Bickerstoff of
Enterprise Equity, Foster Fries of
Brandywine and Bill Miller of
Legg Mason Value fit the bill. Once you have your core holdings in place, the question is: What percentage of a portfolio should you have in your core holdings?
The answer depends on how much risk you want to take. Most portfolios I see have somewhere between 50% and 70% in core holdings.
The next question is, "How do I put money in the hot tech sector without getting burned?" There are three ways to allocate money to the tech sector or any other sector. One is to find a highly focused fund with limited sector diversification, but not a pure sector fund. The second way is a pure sector fund. The third way is a combination of the two. Keep in mind, the purpose is to manage risk while achieving gains and not get killed during a correction.
An example of the first strategy is to use a fund like
White Oak Growth, managed by Jim Oeschlager; the second strategy would use a fund like
Firsthand Technology Value, managed by Kevin Landis. The former is the more diversified, with about 56% in technology, 19% in health care and 25% in financials. Firsthand Tech Value is all in technology and obviously more volatile. Both these managers are on my "A" team, but for different purposes.
White Oak is obviously volatile but less volatile than a pure sector holding. It's a great middle ground and offers a good alternative to taking the risk of a pure sector fund. On the other hand, if you want to be a little more mainline in tech, Kevin Landis' fund fits the bill. You have to be able to withstand more volatility and be able to wait longer to recover. Here's how they have done this year through May 26:
Your investment behavior should not be dictated by the pull between greed and fear. As you look in other sectors like real estate, utilities, energy, health care and financials, be very careful. Think of your investment process as one that starts with creating your strategy first and then picking your funds. When picking your funds, allocate the highest percentage of your portfolio to proven core funds. Allocate less to the more focused funds like White Oak Growth, and still less to pure sector funds like Firsthand Tech Value.
For example, a medium-risk portfolio could be 75% core, 15% focused and 10% sector.
Check out my Nov. 25, 1998, column,
Sector Funds: The Special Teams of Your Portfolio. No more heartbreaks, please!
Have a great week.
Vern Hayden is a certified financial planner in Westport, Conn. He is a financial consultant and advisory associate of Financial Network Investment Corp. He also is an owner of Hayden Financial Group. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at