Not So Out Of Left Field

You see the picture is actually left field. LOL.

On Asia Squawk Box on Wednesday morning (so Tuesday afternoon in the US) they had a guest named Bob Iaccino from a firm called Regan Global Capital. He is on every so often and this time he made a brilliant comment, brilliant for its simplicity.

I'm paraphrasing but he said that for 8 years or so the market goes up about 10% a year and then the market correct down by 40%.

It doesn't quite go down 40% that often, this decade notwithstanding, but the concept is fantastic as was the this is just how it is tone with which he said it.

Different subject. There was an interview with Dan Dolan from SPDR on IndexUniverse and while the interview was not that deep there was a comment from Dan (BTW Dan and I were on the same panel at that conference in Boca Raton last month) about sector investor becoming more popular. It was said in such a way that made me think not many advisers invest at the sector level and this might be right based on some of the things I have heard from other people over the years.

If you have been reading this site for a while you know I am a huge believer in portfolio construction sector by sector. I'd love to tell you it is black box stuff that only sophisticated investors can do but that is not true. You have a template with any benchmark index (we use the S&P 500). If energy is 14% of the S&P 500 (which was the case a/o a couple of days ago), based on what you know do you want to be over, under or equal weight versus that 14%?

On the plus side many energy stocks are down a ton as is the price of crude. On the negative side it could be a while before demand ramps up again because of the current state of the global economy. I am underweight but keep in mind I am underweight almost everything because the market is below its 200 DMA and I have a lot of cash still on the sideline.

And its not like overweight would be 28% or underweight would be 0%. It doesn't take much too change how the portfolio behaves. Additionally the volatility of the sector can be managed too. In a simplistic example of owning just one energy stock; what energy sector allocation will be more volatile, going all in on Exxon Mobil (XOM) or Petrobras (PBR)? You know PBR will give a more volatile ride and you know that when energy does well again it is likely that PBR will go up more than XOM. This could end up being right or wrong during any single event but this is far from difficult to understand.

One last little item, the sector weightings in the SPX have changed dramatically of late, I mean big time. Also XOM is now more than 5% of the index.