Everyone knows you can start a fire using a magnifying glass: Grade school kids routinely put this optics lesson to the test. This experiment teaches a valuable lesson: Focus is a powerful thing.
The power of focusing is the principle behind sector funds, mutual funds that invest in a specific industry. How powerful can sector investing be? At the end of 1999, nine of the 10 funds with the best 10-year returns were technology funds.
Such stellar returns are often the reason investors flock to particular sectors, such as technology during 1999 or financials in the mid-1990s. More recently, at the end of 2007, natural resources and real estate funds led the charts with top-tier 10-year records.
While sector investing offers great potential, it offers great risk, too. We all know what happened to technology and real estate after their runups, and even commodities swooned during the 2008 downturn. How much more volatile can these funds be? The standard deviation (the variation of a fund's monthly returns around its average monthly return) of the average technology fund is almost double the S&P 500's.
In this lesson, we'll discuss the variety of sector funds available, ways you might-or might not-use them in a portfolio, and what to look for when buying a sector fund.
The Many Flavors of Sector-Fund Investing >>