This Is the Joy of Diversification

The chart below captures three stocks and the S&P 500, as measured by SPDR S&P 500 (SPY). I removed the other tickers as that is not the point; SPY is in yellow.

click to enlarge

The blue line is a growthy stock I bought at the start of the chart (early October), the red line is the one REIT I own across the board and the green line is one of two foreign mining stocks in my ownership universe. The blue line shows up 20%, the red line down 15% and the green line with a wild ride to being down less than 1% in a down 4 plus percent environment for the S&P 500.

One reason for the timing of buying the blue line stock was as a counter strategy to my bearish sentiment, that is if the market rallied I figured this would help me to better keep up.

Going into a period where the market was going to drop 4% in two months, I might think the REIT would hold up better than the growthy stock, albeit one with a long term theme I believe in.

The REIT obviously came apart, like most REITs, due to the financial event we are still working through. Take these three as a microcosm for how a properly diversified portfolio can work. The three are from disparate sectors and make an important point. Leadership will come from somewhere. You may be right or wrong about where leadership comes from, but you will have the exposure if you are diversified, meaning you don't have to be right to have a good result.

These are all individual stocks. The stock that is up a lot is ahead of the corresponding narrow themed ETF, the REIT is down more than iShares DJ REIT (IYR) and the mining stock is about even with the iShares Global Materials ETF (MXI); I own MXI for a few accounts. So more risk and more reward with stocks, no shock, than with ETFs, but interestingly enough the net result seems to be about the same.

Taking the path of least resistance is important in life and portfolio construction.

Comments

[roswell007]

I own a couple balanced funds

20% foreign stocks...50% bonds...they have some real estate

Am I diversified?

[Roger Nusbaum]

no idea. i would say to look at what the funds own. i would look for sector overweights. actively managed, broad based funds are often overweight financials which I think would be the wrong place to be overweight these days.