Quarter in Review: Diversification Wins Again (ETFs: IYZ, IVV, SPY; AH)

Includes: IVV, IYZ, SPY
by: Roger Nusbaum

Roger Nusbaum submits: The wrapping up of the quarter allows me to provide a little evidence to a point I have been making since I began writing here, which is that predictions about the market are useless.

The S&P 500 finished the quarter up 3.73%. If you add in the quarterly dividend, the total return would be about 4.13% (ETFconnect has the yield of iShares S&P 500 Index ETF IVV as being 1.59% and the SPDR 500 (Amex: SPY) as 1.6%)

I have been saying all year that I think the S&P will finish the year between 1180 and 1219 -- down a little. I have not changed my opinion nor am I likely to. The prediction will either be right or wrong but for now it is looking very wrong.

Despite being wrong, my generic portfolio was up 5.28% including dividends, but excluding interest earned on cash. It probably makes sense to subtract 0.30% as a management fee (this is my guess of the average fee charged to clients). Keep in mind that any one client may have done better or worse.

This is not fantastic but it makes a couple of points. I wrote all along that the market showed no signs of cracking and that I was not going to try to outguess a big move in the market that may never come. If you can think of the quarter as being successful it was because I stuck to the same things that I always stick to -- being diversified, not making a lot of trades and relying on big picture themes to make overweights and underweights.

I thought that telecom might be in for a good year (see December post) and indeed it was the best performing sector as measured by iShares sector ETFs (IYZ) with a gain of 13%.

The second best performing sector appears to be the industrials with a gain of just over 8%. It is possible that most of the 1.15 basis points I added came from this sector. One name was up 25%, another was up 14% and one other, Armor Holdings (AH) was up 35%. I sold AH this morning very close to the open at $58.61. It has been in this area for a while and I am concerned about it heading back down, the stock is kind of a hot potato.

The industrial sector was not really on my radar at all, yet proper diversification (or at least my perception of it) worked once again. It is a good bet that it will always work. One thing I have written before is that in a portfolio, one stock will be the best performer. This quarter it was AH (unless I am forgetting something). Three months ago I would not have thought AH would have the best quarter out of what I own. It had not moved much in months. The point is that by being diversified my clients had less riding on my being right.

With time and discipline (which each have their own obstacles) this is easily replicated. This will not appeal to people that like to chase heat and trade but for people less interested in high turnover I think the concepts are sound.

One last point to really hit on is that no one can beat the market all the time (Bill Miller, an exception that proves the rule). All I am trying to do is stay close most of the time. If you have saved (or still saving) enough money this is all you have to do.