Which of these two mutual funds with their top half-dozen holdings is more appealing to you as an investment for the next five years?

1) Janus Global Technology: Applied Materials, Cisco Systems, Exodus Communications, Nokia, JDS Uniphase and Sun Microsystems

2) Vanguard Growth Index: General Electric, IBM, Walmart, Cisco Systems, Intel, Lucent

Paul's Answer:

These two funds are so different that your real question is not about which fund is better. You’re really asking what type of asset you should be investing your money in. The Janus fund is actively managed, globally diversified and focuses on a very specialized sector. The Vanguard fund is made of U.S. stocks, it’s an index fund and it includes many sectors of the economy.

I have to assume this is only a part of your portfolio, not the whole thing, and I can’t give you my best answer without knowing what else you have.

But here are some thoughts. On the one hand, I am a strong advocate of index funds and low costs. That points straight to Vanguard. On the other hand, I am a strong advocate of global diversification, and the Janus fund has that. I’m also a great believer in managing risks, so I looked up the average price/earnings ratios for these two funds. For Janus, it’s 56.1; for Vanguard, it’s 41.2. Both are extremely high, but the Janus fund is clearly sticking its shareholders’ financial necks out farther.

So I would throw the question partly back at you this way: How much of this investment are you willing to lose, without bailing out? I think in the Janus fund you should expect a potential loss of 40 to 60 percent sometime in the next 10 years. With the Vanguard fund, expect a 30 to 50 percent loss.

The Vanguard fund lacks any representation in value stocks, which over long periods of time outperform growth stocks. Even the Standard & Poor's 500 Index has some value weighting, so I think you should expect this fund to underperform that index over the next 20 to 25 years.

But the Janus fund is also heavily growth-stock oriented, and over a long period of time it too may underperform the market because of that. Because I like to look to the past for guidance, I checked on the T. Rowe Price Science and Technology Fund, a seasoned and well-respected player in that arena. Annualized over 10 years, this fund’s performance has been nearly 26 percent (vs. 27 percent for the Standard & Poor's 500 Index). In 1991, the fund was up 60 percent. But you could get that return only if you kept your money in the fund for the full year. Would you have done that after the fund’s loss of 1.3 percent in 1990? Last year, the fund was up 42.4 percent. But would you have kept your money there after a sub-par 1.7 percent gain in 1997?

For my money, I would choose the Janus fund if I were dollar-cost-averaging, because I believe this fund’s high expected volatility would let me pick up some real cheap assets during the next significant bear market.

But if I were making a one-time investment to buy and hold for five years, I’d go with Vanguard, primarily because I have relatively low risk tolerance and despite its very high P/E ratio, this fund is diversified into many industries, not just technology.