Peer Groups

 

Whenever I see mutual fund comparisons in the trade publications and in the financial section of the newspaper they almost always mention a specific fund and tell you how good it is in relation to its peer group. A peer group is a specialized sector of mutual funds that all invest in about the same type of stocks or areas of the world or size of companies or some such categorization.

Does this help you make money?

No.

Why?

You have several dogs. A minature poodle, a regular poodle and a very large poodle. On the outside they look very similar, but in performance they can be very different. In a race with a greyhound they will all lose. In a tracking contest with a beagle they will not be able to find the possum. In a contest with a retriever they will not get the bird as quickly. However the large poodle is bigger stronger and can do more than its counterparts. So what? You have the wrong dog for the job.

When you go hunting you don't want a poodle you want a pointer, setter or beagle depending upon the prey. When you invest your hard-earned money in a mutual fund you want the best performer for the type of hunt in which you are engaged and that hunt is for maximum appreciation of your investment. Your prey may change form (from a duck to a possum) and as the prey changes so should the animal (fund) you use (invest) also change.

If you had stayed invested in the best technology fund you could find a year ago, the best one in the entire peer group, I can guarantee you have lost money. The sector has lost more than 75% of it value. It makes no difference if you have the best dog of that breed. If it can't do the job you must change dogs. (Pun intended.)

The important thing to remember when choosing a mutual fund is to find one that is in a sector that is strong NOW, not a year or 3 years ago. When you go back for 3 years or 5 years you will find that there has been a period of time when that sector had or has a very big decline in value. When ANY fund starts down more than 10% to 20% (you decide) it is time to sell it for another fund that is still increasing in value.

When we are in a bear market, as we are now, you may not be to locate one that is going up. Do not listen to any broker who says that a group cannot go any lower. You must wait until you see it increasing in value every week for at least 2 months or more before committing any funds.

You only want to be invested in the best no-load fund in the strongest peer group at all times.

Copyright 2005

 



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