Let's flash back to the halcyon days of the late 1990s, a time when the economy was expanding just about as robustly as the Internet bubble was inflating.
In those days, as you no doubt recall, tech stocks were all the rage, with companies such as Intel (Nasdaq: INTC), Oracle (Nasdaq: ORCL), Cisco Systems (Nasdaq: CSCO), and Dell (Nasdaq: DELL) all delivering fat gains for their happy shareholders.
Not coincidentally, that was also true of many mutual funds that specialized in tech stocks. According to fund tracker Morningstar, the typical "specialty tech" fund gained more than 126% in 1999 -- the kind of figure for which the term "eye-popping" was basically invented, not to mention one that that smashed such market trackers as Vanguard 500 (FUND: VFINX) and the SPDRs (AMEX: SPY) exchange-traded fund over the period.
Unfortunately, the typical tech fund's showing attracted oodles of what's known in the fund business as "hot money" -- i.e., inflows of assets from folks looking to chase last year's returns. Alas, we all know what came next, namely: 2000, 2001, and 2002. During those years, the same average tech fund went from stud to dud, shedding double digits of value and leaving latecomers -- as well as those who hung on just a little too long -- with deflated portfolios and, one hopes, a strong sense of the cyclicality of markets.
Bargain hunting
Eventually, after all, investors really do head in the direction of those areas of the market that appear most attractively valued. Consider the case of a fund I recently recommended in Motley Fool Champion Funds -- the Fool newsletter designed to beat the market while putting the fun back in fund investing.
This pick's smart, valuation-conscious manager basically refused to participate in the late-90s growth craze. And while his fund's poor relative showing during that stretch of time caused many investors to yank their assets, they did so at their own risk -- and at exactly the wrong time. Indeed, those impatient types were surely gnashing their teeth when that same fund delivered double-digit gains during the reign of the bear.
Don't go changing
To wit: If you had plunked down $10,000 in this particular Champ in March 2000, you'd have been sitting atop a pile of more than $25,000 at the end of August 2005. A similar investment in a top-notch index tracker such as Vanguard Total Stock Market (FUND: VTSMX) would be worth a couple hundred bucks less than your initial investment. Meanwhile, the typical tech fund, for the record, would have left you nearly $7,000 poorer.
So, what's the moral of the story here? Good question. One good answer is this: Don't go changing your asset-allocation strategy -- and you do have one, right? -- for the sake of chasing last year's performance models. Hot money almost always goes cold fast. If you had to throw a dart and pick a fund, you'd likely be better off throwing it at a board of recent losers rather than winners.
The good news
The good news, of course, is that you don't have to throw a dart. At Champion Funds, our mission -- which we've enthusiastically chosen to accept -- is to point subscribers in the direction of funds that have what it takes to beat the market and then some over the next three to five years and beyond.
And while I offer picks plucked from all areas of the market, I've highlighted three funds so far that hail from a category whose relative performance doldrums -- like those of the tech sector during the early part of this decade -- make now seem like a most opportune time, valuation-wise, to invest in them.
With that as a backdrop, I encourage you to take a completely risk-free test-drive of our newsletter. You'll have 30 days to decide if it's for you, and you'll also gain access to all our back issues and the recommendations I've made since we first opened for business back in March 2004.
You'll also be sure to learn from and participate in the conversation that's going on right now on our world-class discussion boards. There's a large community of friendly, well-informed Fools for funds, and we'd love it if you joined our ranks. Just click here to give it a whirl and ...
See you on the boards!
Shannon Zimmerman is the lead analyst for Champion Funds and owns shares of Vanguard Total Stock Market. Dell is a Motley Fool Stock Advisor recommendation. The Fool has a strict disclosure policy, and you can read all about it by clicking righthere.
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