Invest against market trends to avoid heavy losses.
Although the term “contrarian funds” became synonymous with the term “Bear Market” during the 1990’s, this is not an accurate depiction of what contrarian funds are and what they do. These funds essentially just invest in the opposite direction of whatever the most common market sentiment is. The result is that when the stock market switches to go in the opposite direction, you’ll already have a lot of investments in that particular industry, or mutual fund.
Contrarian funds are not a very good idea if it looks like the market is going to stay on one trend for a long period of time. If that happens, then it means that the prediction that most of the investments in the market are incorrect is actually wrong. For instance, if the market never switches back in a different direction, you could end up with a hefty investment in a mutual fund that will just continue to lose money. During the late 1990’s, most of the heavy contrarian funds were the worst performing mutual funds in the entire market.
Some people believe that contrarian funds will work to gain money even in a market that is heading downhill. However, that is also not true. Even if you have your money in a contrarian fund, you will still likely lose some money during a market downswing, but in a lot of cases, you will end up losing less money than you would otherwise.
Before you invest in a contrarian fund, you should make sure that you take a good look at what is going on in the market, and look at how that fund has been performing lately. If the fund is not doing well, it can mean one of two things. Either the market is not good for contrarian funds at that point in time – or it might mean that the fund is badly managed. You can find out which it is by looking at the decisions of the fund manager and checking to see whether or not those decisions gave net gains or losses.
In the end, contrarian funds are difficult to pick, but they may keep you from losing as much money during market downswings as you would with a normal mutual fund.