Morningstar's Rules for Buying the Unloved

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Morningstar's Rules for Buying the Unloved

Putting Morningstar’s unpopular-categories strategy into action is simple. In fact, there are just a few rules to follow:

Buy one fund from each category

Staking everything on just one unpopular category can be risky. Not every unloved category will catch fire, and one category can pull the weight for the entire group.

Have at least a three-year holding period

You need a minimum of three years to employ this strategy. After you’ve accumulated your first batch of funds from unloved categories, plan to hang on to them for three years. At that point, you can roll the money into a new batch of unloved funds.

Limit your bets

Resist the urge to put more than 5% of your portfolio into unpopular categories. That way you’ll minimize the disappointment in one of those occasions when the strategy doesn’t work.

Invest new money

Maybe your company paid you a nice bonus this year, or maybe you have some cash you have been sitting on. Consider putting that money to work by buying funds from unpopular categories for the year.

Sell one, buy the other

If you are strapped for cash, consider taking gains on popular fund categories and shifting the gains into out-of-favor categories.

Cut back on the favorites

You can sometimes do yourself a favor by simply reducing your exposure to popular categories. Do so with care, however, because selling your winners could trigger ugly tax consequences or mess up your asset allocation.

Look for Morningstar’s list of popular and unpopular categories on Morningstar.com.