Easy way to buy low and sell high
- Alan Lavine and Gail Liberman
Buying low and selling high works. The big question: When is a mutual fund at its low and when does it hit its high? It's not so easy to tell.
But a recent study by Morningstar Inc., Chicago, found that if you put a small amount of money in the three least popular fund categories and hold those funds for three years, you can profit. Christine Benz, editor of Moringstar Fund Investor, says "70 percent of the time, the out-of-favor funds have outperformed the hot-selling fund groups over the following three years.
That tactic is working today. Those who bought funds that invest in Asia and the Pacific regions of the world in 2001 are up double-digit rates. A few years ago, no one wanted to touch these funds. They were dogs.
This tactic can be a hassle if you don't want to bother looking up Morningstar's most unloved funds at the start of each year or if you don't want to bother to trade. It also is tough to have the patience to wait three years in the hopes of realizing hefty returns.
Of course, you can forget this whole idea. There's always a chance that Morningstar's tactic won't work. Nearly one of three times that you buy the out-of-favor funds and hold them for three years, you won't make a profit. Otherwise, Benz says that you can apply the principals of this tactic more simply by rebalancing your existing holdings.
"The idea behind rebalancing is reducing your exposure to what has worked well in your portfolio and putting the proceeds into what has lagged," she says.
For example, in the late 1990s, the Janus Twenty Fund and the T. Rowe Price Science and Technology Fund were hot performers. Money flowed into these funds at unprecedented rates. Meanwhile, no one wanted to own the Vanguard Windsor Fund, which invests in undervalued stocks. It would have been a good move then to take profits in the hot funds and invest them in the Windsor Fund.
You can do this systematically by keeping a fixed percentage of your money in each asset. At year end, you do what you need to do to maintain your fixed percentage mix. For example, say you have 50 percent in stock fund and 50 percent in bond fund. Because bonds do well, you have 55 percent in bonds and 45 percent in stocks at the end of the year. Take 5 percent out of your bond funds and put them into stock funds.
Be advised that rebalancing works best in a tax-deferred account. Otherwise, you may pay taxes on your trades.
Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).
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