Paul Price: Contrary Thinkers Make More Money

Most mutual fund buyers feel happiest when going with the flow. They pour money into funds when the market is going up then reduce their stakes after major pullbacks. That doesn’t usually lead to great results.

Sector fund investors often make things even worse for themselves. They chase the hottest industry groups while shunning funds that offer the best values when the shares they hold are at low points.

Sources that show which segments of the market are hot, or not, are easy to find. In the six weeks ended Dec. 16, 2014, Value Line reported that all five of the worst performing sectors were energy related. I’m not playing coal because it may be “down for the count” due to changes in environmental regulations. Oil and gas stocks, however, appear mighty tempting for those with time horizons of 6–24 months.

They could easily go higher much quicker than that.

Statistically inclined readers will appreciate the magnitude and depth of oil’s sell-off by seeing that that S&P Energy Industry Group went greater than three standard deviations below normal early in December.

Moves like that are extremely rare. They are typically followed by major reversions to the mean. Mutual fund investors and traders alike should be positioning now for the inevitable rebound in oil prices.

Funds to Play

There are many great funds to pick from. Among the best of the energy-related names are the Vanguard Energy Fund VGENX, with a tiny 0.38% expense ratio, and Fidelity’s Select Natural Gas Portfolio (FSNGX) with just 0.84% in annual expenses.

Pro Funds Oil Equipment Service & Distribution Fund (OEPIX) is a bit more specialized and was even harder hit than the broader based oil funds. Its rebound potential is huge over time. Invesco’s Energy Investor Fund (FSTEX) is another time-tested, long-term winner.

Players wanting direct exposure to crude oil pricing can use the US Oil Fund L.P. (USO) or the iPath Crude Goldman Sachs ETN (OIL) as ways to profit from a recovery.

The Bottom Line

Test your own conviction about where oil prices are headed over time. If somebody gave you the chance to lock in today’s gasoline prices for the couple of years, would you? If so, owning energy mutual funds can help fill your tank down the road as prices at the pump normalize.

Disclosure: Long shares of oil-related stocks BWP, CBI, DNR, DO, ESV, HAL, HFC, HP, SDRL, SLB