We are headed to New York City and I found a couple of interesting articles on my in-flight reading that might be worth mentioning.
The first was an article at Marketwatch where the author made an argument for investing at the sector level. This is something that I believe in doing personally and I think anyone willing and able to spend the time can do this as well.
Basically his point wast that owning large cap, mid cap, small cap and international was not enough diversification--he used the phrase false sense of security. He then went on to point out how the ten big sectors did from 2001 through 2012. A coupe were up big, one was down some, one was down a lot and the rest were in between.
He correctly pointed out that the two sectors that did the worst were at different times the largest sectors in the S&P 500 and used that as an argument in favor of sector investing.
I agree up to a point. Indexing or owning the various market segments with broad based funds is absolutely a valid strategy. But like any valid strategy it cannot be the best strategy for all times. Over the years we've discussed the idea of a sector growing larger than 30% of the SPX as cause to run screaming from the room (slight hyperbole) and that any sector that grows larger than 20% also being a serious warning.
This can be managed in a portfolio oriented to broad based funds. If a sector gets to 25% then sell some portion suitable for you. But if you have the time and inclination for investing at the sector level then go for it. The objective does not have to be outsized gains, reduced drawdowns is a perfectly acceptable objective.
The other article was from the WSJ about the investing and financial planning help now available to 401k participants. Providing financial education to more people is unambiguously positive as a stand alone concept. If the people providing the education are competent and truly want to help people then all the better.
There was one quote in there that I thought was woefully misguided from someone at Morningstar as follows;
The goal is getting the best after-tax return
If this was taken out of context then it may not be woefully misguided. Taking the context as it appears with the return being the top priority, the vast majority of investors should instead focus on the things they have a better chance of controlling like their spending habits and savings rate. Investors will not average 10% per year over some long period of time if the market only averages 2% per year over the same long period of time.
This of course raises the issue of the role that luck plays in investing. If the market goes up an average of 12% per year between your 45th and 55th birthdays then your going to have a much larger nest egg than if the market averages 2% in that same period of your life.
Some folks turned 45 in 1990 and some turned 45 in 2000. The ones from 1990 were not better investors but they were of course luckier investors.