The substantial profit, from your original purchase of Energy Services, in May of 1995, appears to have been made from the viewpoint of a buy-and-hold investor who purchased the fund to hold it for a long period of time. There is nothing wrong with taking this approach with any sector, where you believe that its fundamental strength will produce above average profits over a period of 3,5, or 10 years.
While this approach obviously gives you the ability to weather a greater decline along the way, it can also force you to endure a periodic, and often substantial erosion of your gains, along the way, even when the sector in question is one of the markets strongest ones.
The angst you are feeling at this time, therefore, can probably be attributed more to your additional purchase made this past September, which is feeling the brunt of the fund's recent slide far more than your original position.
There are three basic approaches that one can use with sector fund investing. The first, as mentioned, is a pure buy-and-hold approach with a long holding period established at the get go. In this case, the periodic fluctuations must be completely ignored for many years, since all that they will do is alter your emotional state and draw you away from your original strategy. Major declines, whether caused by fundmental changes in the industry or unrelated market events, must, by definition, be ignored.
A second approach, assuming one feels the same way about a particular industry, is a consistent dollar-cost-averaging strategy. This will work extremely well with a sector that is successful over a long period of time, but unfortunately, as much as it is touted as the way to go with most traditional mutual funds, market fluctuations cause one's emotions to come into play, and few, if any investors actually stick to such a plan month after month. In addition, a DCA strategy with Fidelity's Select will incur a 3% load on every new investment, unless all of the money has previously be subjected to the load prior to investment. DCA into a no load, orno transaction fee energy fund obviously works out better from a dollar and cents standpoint, assuming that the net returns are relatively equal.
Since it was more than two years between your two purchases of FSESX, you obviously do not fit into this category of investor. Your original purchase may have been made with the intention of buying and holding, but you must decide if the latest one was made with the same long term goal.
If it was a second buy-and-hold investment, the recent decline in the fund must be ignored, just like any other declines that will occur between now and the end of your established holding period. If you bought more of the fund in September with the intention of using it as a short term trading position, the timing of the investment was an extremely poor one based on the technical indicators for the fund at that time. Regardless of the quality of its timing, however, as a trading position it should have been disposed of weeks ago. As a long term buy-and-hold position, nothing should be done at this time.
The third approach to sector fund investing is, of course, the employment of a trading strategy. Obviously, this was not your intention back in May of 1995, or you would have sold and repurchased the fund a number of times in the past 2 1/2 years.
As you can see, the investment strategy that you have chosen, and need to adhere to, will determine the quantity of sweat that the fund's recent plunge will produce upon your brow. If you made both purchases as long term buy-and-hold investments, I would suggest that you turn off CNBC, cancel your subscription to the Wall Street Journal, and check your account 5 years from now to determine how good or bad your annualized return has been.
It also appears from your comments about taxes that you have bought this fund in a taxable account. In that case, review your gains and losses for 1997, and see if selling the September purchase at a loss would work out beneficially. Depending upon the status of your entire portfolio, you may want to sell some profitable long term positions to offset the loss in FSESX and eliminate some or all of your tax liability for 1997. In general, however, it is not a good idea to let taxes dictate your buy and sell decisions, but you are in a situation where you may want to take some action in the final days of 1997.
Once you decide which investment strategy you are applying to these two investments, you will know what, if anything, to do with both of these holdings at this time and under similar circumstances in the future. Hope this helps.
Bernie Kaplan
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