Strategy

I tend to agree with the last comment. However, I also believe that there are certain sectors that are growing at a more rapid pace at certain points in time. (i.e. the recent run up in tech since the COVID crisis reached its peak in March). Hence, there is value in a robust sector rotation strategy.
So, I would like to present my question back to Matt and Dan. I know that I am asking a big one here but maybe they could share their outlook on sector rotation strategies and if there is a relatively simple, reliable one that we could employ in managing our portfolios.
I look forward to your reply,
Thank You,
Peter

I agree. I am older than Mat and Dan by at least 10 years, and I'll go for a solid company that's on sale, over diversification every time because if I'm focused on diversification, then I miss a deal and a higher dividend payout from a price drop. Since the crash, I rearranged my entire portfolio to dividend-paying stocks and while I was buying, I was worrying that I was buying too heavily into the financial sector. Then I asked myself why I felt this way? I think the financial "experts" got into my head with the "diversify, diversify, diversify" mantra and set in fear of "doing" investing wrong. I let go of most of my diversification worries after I watched a PPCIAN video where he scoffed at diversification. He basically said McDonalds is all over the world, so there's his diversification. Before I rearranged my portfolio, I went back and looked at the charts of many Canadian sectors from the 2008 crash, and like Mat said, they all dropped. If everything ripples through North America in a crisis, I'm going to buy whatever I want and play the waiting game in a crash. After I watched PPCIAN talk about McDonalds, I've found that many companies with a Canadian home base operate all over the world or across North America, so you could count that as diversification, right?

HI Vanessa,

There is no easy answer to this question as everyone is different. It is also difficult to provide an answer without knowing many details about your portfolio, stage of life, etc. That being said, I can provide a general guideline which can apply to most investors.

First, the purpose of diversification is to mitigate unsystematic risk (that is risk specific to one industry or stock). As an example, if you hold all Bank stocks and we hit another financial crisis, good chance your portfolio will take a hard hit. More so than if banks stocks only accounted for say 10% of your portfolio.

Systematic risk cannot be mitigated through diversification. Also know as market risk, it impacts most of the sectors and markets and is often unpredictable and sudden. The March crash is a good example of this. It hit ALL sectors and although some were hit harder than most - no stock was safe. Furthermore, throughout the last 7 or 8 crashes, no one sector consistently outpeformed. This means, that it really all depends on the type of market crash. This time around Consumer Staples and Tech did well. Next time they may not. Also of note, research has shown that the benefits of diversification tops out at around 26-28 stocks. So if an investor is holding 50 stocks to be diversified, likely having little impact in terms of mitigating unsystematic risk.

IMO, diversification is less important when you are starting out and more important as you near retirement. The thought process here is that younger investors have a longer-term horizon and can afford to take on additional risk as they have a longer period to recoup if there is ever a downtrend or bear market. As you get closer to retirement, investors will want to minimize unsystematic risk by ensuring a well diversified portfolio. Naturally, they have a shorter recovery period. Generally speaking, this aligns with the theory that younger investors have higher risk profile than those nearing, or in retirement.

Case in point, when i first started out - i just focused on buying the best valued companies that fit my strategy regardless of industry. Today, I am paying more attention to diversification but still mainly buying the best company at the best price. I still have a long enough runway to not worry completely about diversification. There will come a time however, where I will shift and ensure i am well diversified.

It is important to note, that this is but my opinion and what has worked well for me. Others may have a different perspective. Regardless, investors will want to try and choose stocks that provide decent value and growth. In the event you are chasing a sector (say Tech right now), don't chase expensive stocks just to increase your exposure in a particular industry. If it was me and I didn't see anything attractive in that particular area, I'd move on and top up my other areas that have some attractive plays. I'd rather be overweight in one area, than overpay for another just for the sake of having exposure. That being said, I believe that you can find value in any industry, even in a strong bull market.

Not sure if this helps, but hopefully it provided some context behind diversification and my strategy.

Mat