Fidelity Select Automotive
Sure, you might think I’m crazy calling out Fidelity Select Automotive (MUTF:FSAVX) as a pick that will kill your 401(k) in 2012. But here’s the bottom line: If you are a 401(k) investor building a broad-based portfolio, it’s unlikely that such a focused sector bet — in this case, on autos — is in your best interest.
Why? Because conditions that make these picks soar quickly can also make them drop like a rock. Case in point: Fidelity Select Automotive suffered an ugly 30% drop across all of 2011.You should never expose your retirement funds to that kind of volatility.
Let’s say though, for the sake of argument, that you’re a savvy investor who wants to bet big on the auto industry and aren’t looking to play it safe. Why would you pay a fund manager to make that bet with a mutual fund when you can cut out management fees and make it yourself? Fidelity Select Automotive has a 0.91% expense ratio, meaning almost 1% is shaved off your returns and pocketed by the managers. Why not just buy individual automaker stocks including General Motors or parts company Johnson Controls (NYSE:JCI) independently? The top 10 holdings of Select Auto make up about two-thirds of the entire portfolio — so it’s not like the fund provides that much more diversification.
If you’re a long-term investor eying retirement, Fidelity Select funds — and focused sector funds of all stripes — probably are a bad bet. They aren’t diversified, expose you to too much volatility and charge rather high expenses to manage your money.
If it’s risky to make big sector plays with your 401(k), it’s downright silly to plow a significant portion of your investments into gold right now. The precious metal is very attractive in an unstable economic environment, but anyone with access to the Internet can find out the boom-and-bust cycle of gold with just a few mouse clicks.
The boom is what all the people on “cash for gold” commercials want you to hear. True, gold has never gone to zero … but gold did drop 65% in just two years across the mid-1980s. And while gold is seemingly a great hedge on inflation because it tends to rise over time, keep in mind that to grow your nest egg, that gold needs to not just keep pace with inflation, but outpace it.
Gold is an investment like most others, with risk and potential. And while gold is a good buy at certain times, it might be nearing a top right now. Consider that the Oppenheimer Gold & Special Minerals Fund (MUTF:OPGSX) fund dropped more than 25% in 2011 — while charging investors a very hefty 1.89% expense ratio on top of that.
You have to count on a heck of a return to outpace inflation and offset those fees. The Oppenheimer fund clearly failed miserably.
Investors should steer clear of this fund, and think long and hard about any other precious metals investment for their 401(k). The returns might have been nice in previous years, but going forward there’s a chance that gold funds could really damage your nest egg.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.