Sometimes when I discuss general investing philosophy with people, I have been surprised by their response. Occasionally they will say something like, I suppose I should care more about my money and investments, but I really don't. I'm just not interested.
I would be the first to agree that money isn't everything, not even the main thing. Generally though, we (or others we know) traded our labor and productivity in exchange for it. It represents our time and effort. Having financial resources is important if only because of the good you can do with it.
Suppose you cross that first bridge and decide that you would like to have your financial assets do as well for you as possible. But how can you achieve better results over time in the investment process? Money doesn't come with any instructions and we teach very little about it in our schools.
Decades ago, Harry Markowitz introduced the concept now known as Modern Portfolio Theory. Instead of chasing fads as most investors did in the first half of last century, he argued that using mixtures of asset classes – stocks, bonds, real estate, commodities – would lower the risk of loss and volatility and ultimately increase the probabilities of gains. He was rewarded with the Nobel Prize for his thinking.
Today, no one argues much with the wisdom of that approach. But recently there is new emphasis on the effect of human psychology and behavior on investing. I would put it this way: Diversification can often help smooth out the rise and fall of your accounts, but if paying attention and changing your asset allocation could help you to avoid the worst losses in an investing cycle, why wouldn't you? It is like a smooth road to mediocrity.
Instead, consider diversification for safety purposes within the asset classes and sectors that are performing the best. Many studies have shown that the strength of a sector's price trend is the biggest determinant of performance of the stocks inside that group.
If your eyes are glazing over, let me give you an example. In the simplest terms, there are less than a dozen groups of companies called sectors. These would include consumer, energy, financial, health care, industrials, materials, technology and utilities. Depending on crowd behavior, government intervention and other circumstances of all kinds, companies in these groups will do much better or worse than others.
In the past year, consumer, health care, and technology stocks have led the way up. Energy, industrial and utility stocks have been out of favor, or at least mediocre in performance. If you own them all by owning an index like the S&P 500, you will get a smoother experience, but why settle for that? Averages are by definition not the best, but the middle.
Pay some attention and either learn the basics for yourself or hire someone to do it for you. Earning a percent or two better than average over a few years can make a big difference for you. It is possible.
This is intended as general information for the public readers and not as individual specific advice. All investing involves risk of loss. Past performance is no guarantee of future results. Sector information is derived from Worden Brothers, TeleChart Gold service, 2013.
Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at firstname.lastname@example.org.