Betting on a Losing Fund

Question: if it is so difficult to compile a portfolio of winning stocks that most professional advisers cannot consistently outperform the market itself, then is it easier to find a losing fund that happens to become a winner later?  I found myself testing that thesis last week, just to see what happens in the coming years.  Not surprisingly, my projected loser is the Vanguard Precious Metals & Mining Fund.

I invested the minimum into the Fund; expecting it to spend the duration of its time in my portfolio at a significant loss considering, after increases of 75% and 40% increase in 2009 and 2010, respectively, it went down 20% in 2011, 13% in 2012, and another 35% in 2013.  However, I suspect it may be substantially undervalued now, or at least ready for some upward recovery.  Therefore, I made the minimum initial investment and I plan to move any earnings (potentially, including reinvested dividends) into a better fund, letting the investment stay at its minimum or fall where the market takes it.  Effectively, I am betting on a losing fund.  In the best case scenario, I would be wrong about the fund's abysmal future.  In the worst case scenario, I would prove myself correct about the gold market.

Often investing is so backwards from our human nature that reverse psychology may be the best guide, just like putting more money into a falling market (which paid off huge for me in 2009).  Relying on human instincts or applying what has been learned from other experiences to the stock market is not a successful strategy for investing.

Additionally, I put the minimum initial investment into Vanguard Health Care Fund on Wednesday evening, and I am strongly considering Vanguard Small-Cap Value Index Fund in the near future.  All of these moves are inspired from the same fact that, although I believe the markets may set a few more record highs, I expect that the top of the market has been reached for all intents and purposes, so there is nowhere to go but down.  In fact, the market has been down ever since my first move(s) on Wednesday.  It would be beneficial to position my portfolio to hedge against market risk, but unfortunately, where the sharpest market declines will be are difficult to ascertain.  In other words, if I expect to lose a lot of money soon, then shifting unrealized earnings into a losing fund is not a big risk.  After all, I do not expect to have this money a year from now as it is.

The benefits of diversification are easy to understand.  Personally, I think most investors latch onto the concept far too early.  But if all your money were housed in a couple funds, then eventually (regardless how broad the funds are), it would be foolish not to diversify into specialized assets (specifically, sector funds) when the warning signs of a market decline are seen.

Case in point, I ran the numbers on my move this evening, and my new sector funds are down a combined $112 since I moved into them.  However, if I had not pulled the money that day, then I would be down another $60, so clearly I made the right choice!