Market Pulse: Diversification – it’s overrated
July 30, 2014
Many advisers and money managers say (and most believe) that being diversified protects clients in bear markets. They tell clients, "Don't worry, you're diversified."
If only that were true. That didn't help in 2000 nor in 2008, and being diversified won't protect you in the next bear market.
Clients won't hear these words from me. Instead of filling portfolios with scores of stocks and income vehicles, I only recommend my top picks and avoid the rest, including even those I like but not quite as much as my favorites.
I'm avoiding Treasury bond funds since higher rates are far more likely than lower ones. Most commodity funds are doing poorly, and municipals don't yield enough. Those are areas to avoid.
When I like an investment I want to hold enough of it to make a difference. That way, one or two good stocks boost portfolio returns. Most of my portfolios have fewer than 15 holdings, and that includes the fixed-income securities.
Readers of this column know that I like the energy sector. My June 19 article, "A Game Changer, Part II," featured Weatherford International (WFT), Spectra Energy (SE) and MDU Resources (MDU).
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Weatherford International rose six percent last week and is up 54 percent year-to-date. That's not a big deal if you hold 50 stocks, but it makes a big difference when you have large holdings in just a few.
Holding a few stocks only works if you buy quality names, however. If you just buy the high-flyers then sooner or later you'll experience "the thrill of victory and agony of defeat."
Instead of swinging for the fences, you'll get more consistent results by owning stable large-cap dividend payers. Pfizer Inc. (PFE), BP (BP), and Verizon (VZ) come to mind. They yield between 3.4 percent to 4.5 percent.
I'm very selective in fixed-income holdings as well. That's the subject of next week's article.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.