A reader named rackgen asks if "all investment classes provide good returns during a robust economy? Logically diversification helps only when done during bears."So this reader likes the boom? Couldn't resist.
He has a point but it is a point that could become a risky concept.
Taken to a ludicrous extreme Trina Solar (TSL) is up 150% YTD so if you put all your eggs in that basket at the start of the year there would have been no need to diversify. The next time the market is down 20%-plus in one year there will be stocks up as much as TSL was this year. Not many but a few.
So to really try to answer his question...I would expect that during boom times all of the big sectors of the market would do well and so in a way the need to diversify could be less.
Of course the next time the S&P 500 is up 20%-plus in a year there will be a few stocks that go down a lot. If you disregard diversification during an up-a-lot year and you buy ten stocks from two sectors and one of the sectors you choose is one of the laggards or a couple of the stocks don't pan out or actually have a bad problem of some sort you will have a problem.
In this decade 2003 has been the only great year with the S&P up 26%. However anyone disregarding diversification and making a bet on the staples sector got pasted as the sector as measured by XLP was only up about 7% or 19% behind the broad market. And if your other sector was Telecom, that one was only up 15% (as measured by IYZ) or 11% behind the market.
In the next boom time there will be haves and have nots as there always are. Guess wrong and you miss out on a big year. Missing out, as opposed to lagging, a huge year is damaging to long term returns. We don't get too many years greater than 25% and in order for most people to make their numbers work they have to be at least relatively close to the market during up a lot.
So to the reader's question, some folks will be comfortable, and successful, betting on some sectors to the exclusion of others so time for some introspection. How much sector risk are you willing to take? How much risk are you qualified to take? There is no right answer for everyone, only a right answer for you.
15 comments:
Just a random thought here, in light of the recent comments by Jim Rogers and others regarding commodities. In the past, supply and demand has
determined which sector/countries do well and which do not. The fact that we have reached peak oil (at least easy to get oil), and might be soon reaching peak food, and peaks in certain metals, means that there will be predictable and ongoing shortages in the supply of these commodities (witness wheat).
One of the first things poor people in China want
to do with increasing income, is to eat more meat,
buy a car, and drive to the nearest KFC, while listening to their iPods.
We are unlikely to ever face "peak financials/banks",
but we are likely to face ever increasing costs of
energy/natural resources, and ag commodities (MOO and DBA beging better vehicles than XLP).
So, does it not make sense to be heavily overweighted in those sectors for the foreseeable future? One of the top 5 MF managers in the world, Ken Heebner (CGMFX) has a portfolio that
mirrors JR's predictions, and you can see what
he has done recently. I wish i had bought that fund! Please critique my thinking.
Also, thanks, Roger for giving us the link to T's
blog. He is one savvy investor, and I learn from
looking at his approach as well as yours. Thanks,
and hope that you don't get too much snow in
Preskitt in the next few days.
Cheers, Scoot
scoot, from your past question i know you are willing to go heavier into a theme that you like than I am willing to go. No right or wrong just different. if food has a ten year raging bull market but cuts in half one year along the way, which is plausible, would you want to ride that out?
heavily overweighted is subjected but i find most folks i encounter have a different idea about what that means than I do.
as far as financials there is no question that at some point they will absolutely be the place to be.
I'd also keep in mind that Jim Rogers is on the stump selling his new book.
Scoot -
I'm a big fan of Heebner's too and use mostly oef's to construct my portfolio (because as my tagline says, I'm truly an amateur investor). Any thoughts/names-to- throw-out on other top MF managers ?
A little OT but the MarketWatch Bulletin subject title “Goldman Sachs CEO Lloyd Blankfein to get $68 million bonus” strikes me as a little obscene. I wonder what his base salary, options and perks are??
From the FWIW file.
Mark
i saw a couple of things on the network this week, maybe you did too, that say his bonus is justified and one instance that spun it as he is underpaid.
i have no dog in that fight i don't care either way but it does incite some good debates.
few years ago Disney's net for the year was $125 million. Eisner, the boss at the time, got $120 million in compensation that year. That was obscene and detrimental to shareholders.
In this case, GS made crap load of money while its direct competitors lost numerous billions on the exact same investments.
While i am wholly against the idea of executive of public companies making so much money, this may be the exception that proves the rule.
Amateurinvestor, here are a couple of names of
guys I like for what it is worth. Well, besides Roger of course.
There is a young guy who took over FDSVX, a large
cap growth/discovery fund and I really think he is
going to be one of the best. I like FAIRX with Berkowitz, because it is a way to buy Berkshire cheap, but as goofy as Buffett is sounding lately, I wonder whether or not his stock is just a dinosaur-in-waiting.
Roger, I was just suggesting that the supply and demand dynamics of energy and ag are changing
in ways that financials never will. Just my thought.
Scoot
I might be a little pre-mature in my timing, but it starting to look like its time to buy financials. (xlf). Currently xlf is about 29.25. The bottom over the last couple months is 28.25. It seems to be holding at a floor over the Month of Nov. and Dec. Any suggestions?
not my type of trade.
i have mentioned b4 that when the yield curve normalizes there will then be a fundamental basis for increasing the weighting. I have no idea if that will be at the bottom, before the bottom or after the bottom.
you might be right but i don't see an fundamental justification for domestic financials.
http://stockcharts.com/charts/gallery.html?$NYHL
The new His to lows does not look good.
Financial's are likely to look like a good value as they continue to decline. Typical value trap that people buy into during the decline.
That said Roger does not try to pick bottoms and personally I just do not see it either. If you think you can pick the bottom, are you really sure about that with hard earned dollars.
IMO there is more and more evidence of a bear comming. I think it all depends on how big the housing problem is going to be.
Wall street will not completely admit to the size of the problem right now. One reason is they may not know the other reason is they can not admit to how large there mistakes are all at once.
I think it will be rather interesting for at least a few more months possibly many more months. Remember the way level 3 assets are being handled are currently changing dramaticly.
amatuerinvestor. Take a look at WRGNX. This fund is run by David Winters. He had a great track record at Mutual Series and worked with the famous value investor Michael Price. I believe in 5-10 years he will be highly regarded as Warren Buffett, and Marty Whitman are today.
Correction. The fund symbol is WGRNX.
So far, not so hot for WGRNX.
http://tinyurl.com/2hpclg
Don't stop me, I have to comment.. its regarding my comment! :)
Yes roger, you are bang on. In that case I guess we can use sector specific ETFs or in worst case scenario Mutual funds[gasp!] During the boom we needn't worry, since the rising tide lifts all ships.
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