I cannot emphasize enough how important it is to be invested in the right sectors at the right time. It is just as important to be out of the wrong sectors at the right time.
This year has been good for equity investors so far. The S&P 500 is up about 13 percent year to date. The tech-heavy Nasdaq is up almost 18 percent. Sitting on the sidelines of the U.S. stock market has obviously not been a good place to be.
I know all the doom and gloom pundits and newsletter writers have you scared to death. The crash of the dollar is just around the corner and inflation (learn more)will run wild! While that scenario may play out at some time in the future, sorry Peter Schiff, it has not been a money-making strategy for several years now.
Emerging markets have performed very poorly in 2012. As a group, they are down about 2.2 percent for the year. Natural resources and commodities have also been a poor place in which to be invested in 2012. The “sell everything and buy gold” mantra may be good for precious metal coin sales, but it has not done much for your 401(k) over the last year.
I have seen many 401(k) plans from a variety of companies over the years. They range from a full palette of Fidelity funds, to a very narrow range of about a dozen funds that cover the various basic asset classes. Some companies, like Qualcomm, are now allowing participants to invest in individual stocks.
It is hard for me to give advice that fits all 401(k) participants. A lot of it depends upon your age and your tolerance for risk. However, I do have a pretty good handle on the best places to generally be invested in right now. I also have a good feel for the areas to avoid currently.
The medical and biotech sectors, in general, have by far been two of the best places to be invested in this year. With Obamacare looming, many health-care related and drug-related companies will benefit from a lot more folks being in the system.
I have my own ranking system of stocks and mutual funds that I invented for myself, to help me as a professional money manager. There are more than 16,000 mutual funds, 3,000 stocks and about 2,000 exchange-traded funds from which investors may choose. I needed a system that made my life easier in the selection process.
As far as stocks go, I like to combine performance with value. As it relates to mutual funds and exchange-traded funds, I focus on relative performance and safety. I liked the system that I developed so much that I made it available to the general public as an app called Best Stocks Now.
Let’s take a look at some of my top-rated mutual funds right now that may be of interest to 401(k) investors. Let’s begin with the T. Rowe Price Health Science Fund.
This is currently one of the highest-rated funds in my grading and ranking system. Let’s first look at its short-term, intermediate-term and long-term performance.
As you can see, this fund has far outperformed the S&P 500 over the last one, three, five, and 10 years. It also delivered 10 points of alpha during the big sell-off in 2008.
Keep in mind that the performance grade of “B” is very good for a mutual fund that is competing against about 2,800 individual stocks.
Keep in mind that an overall grade of B+ and ranking of 293 is outstanding for a mutual fund competing against stocks!
Let’s now take a look at a biotech fund. I am going to use the Fidelity Select Biotechnology Fund as an example:
You can see how this fund (and this sector in general) has handily outperformed the market by a very wide margin over the short term, intermediate term and long term. Note also that the fund was only down 11.4 percent, while the market was down 38.5 percent in 2008! It seems that the biotech sector has a bit of a defensive nature to it.
When I analyze mutual funds, I like to consider funds that are trading in about the upper 25 percent of my overall ranking system. I am currently working on an app that will just compare mutual funds, but for now they are part of a database that includes stocks and ETFs. This fund is also in a very sweet spot in the market.
Let’s look at another sweet spot in the market right now. I am going to use the Fidelity Advisor Technology Fund for this illustration:
Notice how this fund has performed against the S&P 500 over the short term, intermediate term and long term. With the leading index in the U.S. being the Nasdaq so far in 2012, it makes perfect sense that a technology-based mutual fund would be highly ranked.
I could show you some other sweet spots like the real estate sector, but this should be enough to illustrate the point of how important it is to be in the best sectors in the market at any given point in time with your 401(k). It is also important to make changes along the way as market cycles change.
—By TheStreet.com Contributor Bill Gunderson
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At the time of publication, Bill Gunderson held no positions in any of the stocks mentioned, although positions may change at any time.