Should I just stick with the funds that have had the highest long term returns?

Question

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.

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?

Answer 1

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.

Answer 2

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".