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What drives VGELX or VGENX? I understand that the health of the world economy is key, but I also thought that the recent unrest in the Middle East might have caused these funds to skyrocket. What are the primary forces that would affect these funds?
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Sector funds are tough. The current state of world events are probably already priced into the markets. I did see an interesting article on Yahoo a couple of days ago on why Exxon Mobil is struggling.
Years ago we invested in sector funds such as Energy (I used to think the same thing here), healthcare, and precious metals. We sold all of them and invested in the Total Stock Market Index fund. The only other asset class we invest in is real estate via the REIT index fund.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"
Disclosure: Three Fund Portfolio + REITs
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There is an imperfect correlation between stock funds (of a resource producer) and the resource price.
In essence the market also takes a view on:
- whether current prices will continue, rise or fall
- whether resource producer managements will distribute the free cash flow to investors (assuming prices are high for the product) or invest it wastefully in large new projects and/or Mergers and Acquisitions
Where you can do well is if it becomes cheaper to 'drill' for reserves by buying other quoted companies in the stock market, rather than by exploration. That happened to oil in the late 1900s when Exxon bought Mobil and BP bought Amoco.
But look at the mining industry recently. Rio TInto, Anglo American and BHP have all had to sharply reduce capital spending, having admitted that major investments they made are facing soaring costs and other issues. Similarly, big oil is finding it hard to replace reserves-- spending more and more in more difficult places. And as BP found out at Deepwater Macondo, this also entails higher risk.
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We have come a long way in investing. It used to be there were just "stock" funds and "bond" funds. Now we can buy slices of the market in many different flavors. We can choose if we want those slices indexed or managed.
I have been a fan of energy and natural resource investing. It is a way of investing in commodities but by owning the companies that produce them rather than the commodities themselves. My investments in energy and natural resources for the most part of worked out really good for me. The one or two clunkers didn't hurt me much at all.
So I can see a great appeal to owning an energy sector fund or a good natural resource fund. I would see this as owning another asset class.
It really comes down to investment philosophy and taste. Most investors are best served by investing in the broad markets rather than picking sectors.
The problem with sector investing is that the economy changes over time. For example, the financial sector used to be a no brainer. These stocks tended to pay nice dividends and had a bit lower P/E's than the market as a whole. These tended to be very profitable companies. The Davis family (Shelby and Chris) largely built their careers as investment managers on the financial sector. After the AIG debacle and the collapse of Lehman Brothers, we learned that this sector is a lot riskier than what we had perceived.
Ditto with energy. Oil Stocks used to be a no-brainer. As Oil gets harder to find, the risks of getting it out of the ground are greater. Another poster brilliantly pointed out B-P's troubles. I am not sure that the large multi-national oil companies are as safe as perceived.
I also own REIT funds, which are basically sector funds. These have shown some incredible volatility, going up or down 8-10% in one day!! Profitable but risky. These used to be a value story, but now I see these listed as mid-cap growth rather than mid-cap value. So the secret is out!! A lot of folks are buying these.
So I am thinking that for most folks, they ought to think in term of the broad indexes. There is a lot of risk in the sector funds. I have been rethinking my philosophies on these investments.
A fool and his money are good for business.
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