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Since I won't be touching the money in my retirement accounts for decades into the future (I'm 24 years old), does it make sense to just invest the money in volatile sectors of the market, but that have outperformed the average annual return of an "all stocks all sectors" kind of portfolio over the long term (10+ years)?

Assuming I really don't care about a 25% loss in a given year here and there, as long as the performance of the portfolio over the long term is above average, does this strategy make sense in a purely mathematical, emotionless sense?

For example, I'm considering buying funds invested in the Biotech, Software/IT, Retailing, Pharmaceuticals, and Chemicals sectors of the market, which have outperformed the typical 7% average annual return of a typical "all stocks all sectors" portfolio.

Note: the highlighted column is the average annual return of each fund for the last 10 years. enter image description here

Of course, I can be a little active every now and then about this; that is, if I hear that congress is about to pass price controls on drugs, then it'd be cautious to pull out of biotech and pharmaceuticals to see what the consequences are over the long term.

Is this strategy too risky and something only a foolish person would try?

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    Past performance is no guarantee of future results. Just because the biotech sector (for example) has outperformed the general market for the past 1/3/5/10 years does not mean it will continue to do so. – The Photon Jan 30 '16 at 1:54
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Placing bets on targeted sectors of the market totally makes sense in my opinion. Especially if you've done research, with a non-biased eye, that convinces you those sectors will continue to outperform.

However, the funds you've boxed in red all appear to be actively managed funds (I only double-checked on the first.) There is a bit of research showing that very few active managers consistently beat an index over the long term. By buying these funds, especially since you hope to hold for decades, you are placing bets that these managers maintain their edge over an equivalent index. This seems unlikely to be a winning bet the longer you hold the position.

Perhaps there are no sector index funds for the sectors or focuses you have? But if there were, and it was my money that I planned to park for the long term, I'd pick the index fund over the active managed fund.

Index funds also have an advantage in costs or fees. They can charge substantially less than an actively managed fund does. And fees can be a big drag on total return.

  • All of them are actively managed. I do admit that I'd prefer a fund that just tracks an underlying index, but it appears Fidelity doesn't offer any for these sectors. Also, I just noticed that half of these fund managers are new to the fund (1 year tenure). Is this something I should be worried about? – AxiomaticNexus Jan 30 '16 at 19:20
  • Have you checked for non-Fidelity sector index funds? Many non-Fidelity funds are available through Fidelity, but access would depend on the type of account. 401k's might have limitations but brokerage or IRAs shouldn't. If you want to stick with mutual funds, then Vanguard has a few sector index funds: investor.vanguard.com/mutual-funds/… Or you could try ETFs instead, for example, sectorspdr.com/sectorspdr or qr.fidelity.com/embeddedquotes/redirect/research?symbol=FHLC Personally, I'd be worried about short tenure. – davmp Jan 30 '16 at 19:29
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You should establish a strategy -- eg a specific mix of investments/funds which has the long-term tradeofv of risk, returns, and diversification you want -- and stick to that strategy, rebalancing periodically to maintain your strategic ratios betwedn those investments.

Yes, that means you will somettimes sell things that have been doing well and buy others that have been doing less well -- but that's to be expected; it's exactly what happens when you "buy low, sell high".

  • So is this strategy not too crazy? I understand that it's somewhat riskier in the short term, but over the span of a few decades, realistically speaking it should perform at least as good as a portfolio invested in a total market kind of fund. Right? Realistically speaking I don't think these 5 sectors can do so horribly bad in the future to significantly set me back compared to a standard portfolio. – AxiomaticNexus Jan 30 '16 at 3:31
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    As @thephoton said in the comments, the fact that a fund or sector has performed well is not, by itself, an indication that it will continue to do so. Volatility is not an indication either. You need to think about why you are making these particular bets -- and if you can't answer that question with any confidence you're almost certainly better off diversifying more. – keshlam Jan 30 '16 at 4:47

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