The last two years or so have been particularly difficult times for investors.
The current issue presents compelling data that shows a unique way of viewing what has been transpiring. But, most importantly, it shows you an important new strategy that you can use to guide your investment decisions from here on out.
It makes sense to maintain a "core" holding of funds down through the years regardless of the evitable ups and downs. Too many investors keep a fund position for too short a time before closing out the position and switching to a new fund. This subjects you to the increased possibility of making your decisions on the basis of short-term psychology, often leading to poorer rather than better performance.
But unlike maintaining a pure buy and hold strategy, or even one that allocates the same fixed percentages into several funds, there can be an even bigger reward in being able to determine the relative attractiveness of different types of funds: that is, which categories of funds are comparatively undervalued and which may be overvalued.
Although different categories of funds can perform poorly or well above average for periods of several years or more at a time, no category of investment can continue to be near the bottom or at the head of the pack, year in and year out. Consequently, a fund category that has performed well in the past but has not recently been doing relatively well is usually a good place to look for potential market-beating performers in the years ahead. Conversely, it makes sense to not always keep adding to your investments in those categories that are "winners", but to look elsewhere at times.
Once such target categories are identified, you can then direct most or all of your new cash into the undervalued areas, while very gradually shifting some existing shares from overvalued areas to undervalued ones. By adopting a gradual redistribution approach rather than "all-or-none", you give yourself protection against the possibility of misjudging a move based on short-term psychology rather than a true long-term trend.
But how can you recognize potentially under- or overvalued categories of funds?
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Tom Madell, PhD
