...why even try to pick individual stocks at all? I tend to just stick to broad, low cost index funds, and try to figure out when to buy and sell, rather than trying to pick specific stocks in any country or portfolio. At most, sector selection is helpful, but if you believe that the top-down approach accounts for 70-90% of a stock's performance, then specific stock selection might be an inefficient allocation of your time and resources.
Of course not everyone should try to pick stocks. Whether or not to pick stocks boils down to a combination of investment philosophy and time available to devote to the task.
Broad index funds take in the good and the bad. Obviously any domestic broad index fund will own too much of the wrong thing when that wrong thing finally goes bad like tech 12 years ago and financial stock four-five years ago. Broad foreign index funds tend to be heaviest in the countries that have done the worst over the last few years and I expect these countries will continue to struggle moving forward; these being Western European countries and Japan.
The reader seems to believe sector selection is helpful. As mentioned many times here in the past, a sector growing to more than 20% of the S&P 500 is at a minimum a flashing yellow light with 30% being cause to run screaming from the room. In addition there are also pretty reliable cyclical indicators for some sectors. There are sectors that tend to be defensive and hold up much better during downturns. The industrial sector tends to go down more and recover quicker as another example. Utilities are vulnerable to rising rates. The Select Sector SPDRs offer the chance to see how these things can work as they date back to the late 1990s.
As for country selection, a couple of years ago I made many references to some number crunching of country returns for the previous decade done by Bespoke Investment Group. Several markets like the US, a few in Western Europe and Japan were down for the decade ended December 31, 2009 while Brazil was up 300%, Chile was up almost 190% and Norway about 120% as a few examples. Country selection can be picking a country based on an assessment of merits but it can also be a process of figuring out what to avoid. I believe the numbers from Bespoke are compelling because the it was not just off the wall investment destinations that did well.
One recurring theme here over the years has been managing the attributes of the portfolio. There are times when it makes sense to increase or decrease things like volatility, yield, the extent to which the portfolio is similar to the market and some other things as well. To the extent you believe in this philosophically or that it is in your wheelhouse it is much easier to accomplish with very narrow products like individual issues and niche ETFs.
Again this is not right for everyone but to the reader's question, why pick stocks, the above is part of the rationale.
3 comments:
Thank you Roger, I appreciate the follow up! You make some very good points. For me the bottom line, which I think you allude to, is that individual stock selection is a time consuming process. You need to pay attention to many specific details such as management changes, company balance sheets, earnings reports, product or service launches, etc. As an individual investor with a full time (non-financial) job, I just don't have the time or wherewithal to keep tabs of this important information -- for domestic stocks in the U.S. let alone foreign countries.
Having said that, I appreciate that as a financial manager of OPM, that would be a critical aspect of your job! Cheers and have a great weekend.
I enjoy the hunt for a few stocks to add some alpha to my portfolio of mutual funds and etfs. The decisions are mine alone, and I'm far more engaged following those companies than I am with my other funds. It's a bit like filling out brackets for March Madness vs, simply watching the tournament on television.
I also take more pride in outperformance, and I'm more patient when I understand the fundamental reasons that my stocks act the way that they do. I don't waste time anymore listening to so-called experts trying to rationalize overall market performance.
Bottom line, holding a few stocks is just plain fun. But that's me.
12:55...
I'm with ya all the way. Most of my 'stash' will always be in MF's/etf's (including RRGR in a few days), but, i've always played the stock market on my own, recently began doing options - and i've had some success, and it's been a lot of fun.
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