Some thoughts on AA beyond Roth (stocks)

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Topic Author
fingoals
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Joined: Thu Jan 24, 2019 6:43 pm

Some thoughts on AA beyond Roth (stocks)

Post by fingoals » Mon Feb 11, 2019 5:21 pm

Recently I looked at details for my university's 403(b) and 457(b) plans at Fidelity (which would be my preference vs. TIAA and VALIC). Skipping the 457(b) for the moment (due to lack of Roth option for it), I was curious about whether it might be a good idea - after maxing out my Roth IRA for 2019 - to start contributing to 403(b) or, if I switch to an industry job, to 401(k) with a sector-focused approach.

I realize that predominant strategy for Bogleheads is owning the whole market (via relevant index funds), however, I have a thesis that, in short-to-middle term, some industry sectors - technology (biotech, advanced materials, solar and other alternative energy options, AI, autonomous vehicles - not necessarily autonomous driving, but drones, automated delivery, etc.), software, insurance, healthcare - will grow faster (or, at least, will be more stable - especially insurance and healthcare) than others (e.g., oil and gas). With that in mind, I looked at what funds are available at Fidelity for the 403(b) plan (I'd like to select the Roth option). A brief research on Fidelity site indicated some attractive (IMHO) - vs. total market index funds - industry sector-focused funds from Tier 3: Expanded Investment Options, as follows. Please critique my thesis and/or fund selection and share your thoughts on this.
  • Fidelity® Blue Chip Growth Fund - Class K (FBGKX) | Average Annual Return 10 Yrs: +18.94% | ER: 0.62%
  • Fidelity® Select Software and IT Services Portfolio (FSCSX) | Average Annual Return 10 Yrs: +22.15% | ER: 0.73%
  • Fidelity® Select Insurance Portfolio (FSPCX) | Average Annual Return 10 Yrs: +15.09% | ER: 0.79%
  • Fidelity® Select Health Care Portfolio (FSPHX) | Average Annual Return 10 Yrs: +19.28% | ER: 0.73%
  • Fidelity® Select Medical Technology and Devices Portfolio (FSMEX) | Average Annual Return 10 Yrs: +18.19% | ER: 0.76%
I'm not sure about the last item above - originally, I wanted to include a pharma-focused fund, but returns there are not impressive, so I added FSMEX as an arguably nice addition to the healthcare-focused FSPHX. Thank you!

rkhusky
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Re: Some thoughts on AA beyond Roth (stocks)

Post by rkhusky » Mon Feb 11, 2019 5:41 pm

The first thing to ask yourself is - What do you know that everyone else, including the professional investor, doesn't know? If these areas are expected to out-perform other areas, that expectation is already priced into the stocks.

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willthrill81
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Re: Some thoughts on AA beyond Roth (stocks)

Post by willthrill81 » Mon Feb 11, 2019 5:45 pm

rkhusky wrote:
Mon Feb 11, 2019 5:41 pm
The first thing to ask yourself is - What do you know that everyone else, including the professional investor, doesn't know? If these areas are expected to out-perform other areas, that expectation is already priced into the stocks.
Bingo.

Picking sectors is no easier or likely to be successful than picking stocks.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

megabad
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Re: Some thoughts on AA beyond Roth (stocks)

Post by megabad » Mon Feb 11, 2019 6:30 pm

I believe that the only thing guaranteed with such a strategy is that you will certainly pay >4 times the cost (in expenses) that you would holding the same stocks in an index fund. This is not attractive to me, but to each his/her own.

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fingoals
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Re: Some thoughts on AA beyond Roth (stocks)

Post by fingoals » Mon Feb 11, 2019 8:48 pm

rkhusky wrote:
Mon Feb 11, 2019 5:41 pm
The first thing to ask yourself is - What do you know that everyone else, including the professional investor, doesn't know? If these areas are expected to out-perform other areas, that expectation is already priced into the stocks.
I don't think this is about what I know that others don't. I think it's about what I (and other people with similar opinions) believe in. For example, out of the whole pool of investors, a subset (myself included) believes - based on their industry knowledge / experience / intuition - that certain sectors' stocks (say, software, healthcare, insurance) will outperform and/or will be more stable than some others'. The rest of investors (or another subset) believes more in some other sectors (say, traditional energy, manufacturing, whatever). In this scenario, for the first group of investors, holding total market or cross-industry index fund stocks implies including stocks from sectors that they believe will under-perform or be more volatile than stocks from their preferred sectors, which IMO does not make much sense (unless one does not have a strong opinion on specific industry sector's future trends or wants to play it safe). This is the basic logic, underlying my thesis. I'm happy to hear any counter-arguments.

Regarding "that expectation is already priced into the stocks", again, it is not about stock pricing, but rather an attempt to eliminate from one's portfolio under-performing / more volatile assets (based on their beliefs). Isn't that the point of having industry sector-focused funds at all?
Last edited by fingoals on Mon Feb 11, 2019 8:54 pm, edited 1 time in total.

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fingoals
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Re: Some thoughts on AA beyond Roth (stocks)

Post by fingoals » Mon Feb 11, 2019 8:49 pm

willthrill81 wrote:
Mon Feb 11, 2019 5:45 pm
rkhusky wrote:
Mon Feb 11, 2019 5:41 pm
The first thing to ask yourself is - What do you know that everyone else, including the professional investor, doesn't know? If these areas are expected to out-perform other areas, that expectation is already priced into the stocks.
Bingo.

Picking sectors is no easier or likely to be successful than picking stocks.
Thanks! :-) Please see my reply to @rkhusky above. Your feedback on my thoughts will be appreciated.
Last edited by fingoals on Mon Feb 11, 2019 8:52 pm, edited 1 time in total.

Topic Author
fingoals
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Re: Some thoughts on AA beyond Roth (stocks)

Post by fingoals » Mon Feb 11, 2019 8:51 pm

megabad wrote:
Mon Feb 11, 2019 6:30 pm
I believe that the only thing guaranteed with such a strategy is that you will certainly pay >4 times the cost (in expenses) that you would holding the same stocks in an index fund. This is not attractive to me, but to each his/her own.
Thanks! :-) Please see my reply to @rkhusky above. Your feedback on my thoughts will be appreciated.

megabad
Posts: 961
Joined: Fri Jun 01, 2018 4:00 pm

Re: Some thoughts on AA beyond Roth (stocks)

Post by megabad » Mon Feb 11, 2019 9:12 pm

fingoals wrote:
Mon Feb 11, 2019 8:48 pm
Regarding "that expectation is already priced into the stocks", again, it is not about stock pricing, but rather an attempt to eliminate from one's portfolio under-performing / more volatile assets (based on their beliefs). Isn't that the point of having industry sector-focused funds at all?
But it is about stock pricing. In a free market, pricing is based on perceived value. You are valuing certain sectors more lowly than others (because you perceive them to be "underperforming" or "volatile"). In such an effort, you have surmised that the value (or price) of such sectors stocks should be lower than the market indicates. If you felt the price was fair, you would buy those sectors, but you do not. You have bet against the market. This may be a good bet or not, only time will tell.

Ironically, the point of having industry sector focused funds is that fund companies saw that customers like you demanded them (or assigned perceived value to them).

My point was simply that you have chosen to pay significantly higher expenses for such a strategy when compared to market cap based indices. Thus, just like investors who invest in other active funds, you have an additional headwind that must be overcome by the funds investment strategy.

Topic Author
fingoals
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Re: Some thoughts on AA beyond Roth (stocks)

Post by fingoals » Mon Feb 11, 2019 9:25 pm

megabad wrote:
Mon Feb 11, 2019 9:12 pm
fingoals wrote:
Mon Feb 11, 2019 8:48 pm
Regarding "that expectation is already priced into the stocks", again, it is not about stock pricing, but rather an attempt to eliminate from one's portfolio under-performing / more volatile assets (based on their beliefs). Isn't that the point of having industry sector-focused funds at all?
But it is about stock pricing. In a free market, pricing is based on perceived value. You are valuing certain sectors more lowly than others (because you perceive them to be "underperforming" or "volatile"). In such an effort, you have surmised that the value (or price) of such sectors stocks should be lower than the market indicates. If you felt the price was fair, you would buy those sectors, but you do not. You have bet against the market. This may be a good bet or not, only time will tell.

Ironically, the point of having industry sector focused funds is that fund companies saw that customers like you demanded them (or assigned perceived value to them).

My point was simply that you have chosen to pay significantly higher expenses for such a strategy when compared to market cap based indices. Thus, just like investors who invest in other active funds, you have an additional headwind that must be overcome by the funds investment strategy.
I appreciate your insights and prompt feedback. Will think more about the subject and your points. Best regards.

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