Just when you think something's dead and gone, it often proves that the rumors of its demise were greatly exaggerated. Nowhere can you find more examples of that phenomenon than with investing, where so many things seem to cycle in and out of favor.
Recently, a bunch of mutual funds have been enjoying strong comebacks after the devastation of 2008. Looking over a list I saw on Fidelity's website, I realized that many of the funds were fairly "focused" or "concentrated," meaning that they held relatively few different stocks. Check out these examples:
|
Fund
|
2008 Return
|
2009 Year-to-Date Return
|
Number of Holdings
|
Top Holdings Include
|
|
Ariel (ARGFX)
|
(48.3%)
|
54.1%
|
32
|
Newell Rubbermaid (NYSE: NWL ) , IMS Health (NYSE: RX )
|
|
Dodge & Cox Stock (DODGX)
|
(43.3%)
|
29.9%
|
85
|
Merck (NYSE: MRK ) , Motorola (NYSE: MOT )
|
|
Janus Overseas J (JAOSX)
|
(52.8%)
|
72.4%
|
85
|
Petroleo Brasileiro (NYSE: PBR ) , Research In Motion (Nasdaq: RIMM )
|
Data: Morningstar.com.
Not every fund on the list was focused, since concentration isn't the only road to success. But in general, being focused can help a fund deliver results that are exceptionally strong -- and sometimes, exceptionally weak. That's because their managers are demonstrating real conviction by putting their money in their best ideas.
Think of big, familiar funds such as Fidelity Magellan (FMAGX) and Fidelity Contrafund (FCNTX), with 230 and 413 holdings, respectively. The Contrafund managers like supermarket company Kroger (NYSE: KR ) enough to invest in it, but only with 0.0092% of the fund's assets -- just $5 million worth out of $59 billion. How much difference do you really think that investment will make to the fund's performance? Even if Kroger quadruples in value in short order, it will have almost no impact on the fund's performance as a whole.
With stocks, too
The value of focusing holds true for stocks, as well. Look for signs of imbalance in your portfolio. Do you have $10,000 invested in one stock and $1,000 in another, with equally high expectations of both? Do you have 65 stocks in your portfolio, and you're unable to keep up with them all? If so, then some might be about to swoon, and you'll be caught unaware.
You don't have to be focused to do well, but it is smart to only invest in companies and funds in which you have high confidence and high expectations.
Are you looking for financial security? Let Jim Royal show you how to secure your financial future with these stocks.
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