From not being diversified to owning too many tickers?
Posted By RichC on October 12, 2021
For most investors, the normal criticism is that they are not diversified enough … or at least they often own too much of one sector or one stock (happened in the old days when companies often matched or did a partial match in company stock). I’ve tried to keep “diversity” in mind over my lifetime of investing, but noticed that I drift towards buying over-sold sectors. The wise investor stays away from too much in one sector like being overweight in on area or one stock … sort of like I was with technology a few decades ago. But when the tech sector became popular or in my view began to get too hot, I took the contrarian route and sold … way too soon I might add. There is something to be said for a rising tide lifting all boats when the crowd piles in … stay in a while! Unfortunately when investments seemed overvalued, I got and still get nervous.
It is happening again with the changing business cycle (graph below). I’ve been long in the out of favor energy sector for a few years now, especially as it comes under attack by climate extremists and bureaucrats. We all still use it and need it, but the heavy hand of big government rarely manages the change appropriately. We’re shifting from fossil fuels to wind, solar and cleaner renewables and the pressure is on to give up fossil fuels in western
countries before replacements are adequate. Politicians, in the name of a cleaner planet, dictatorially use their power to regulate, legislate, incentivize and tax to stop pipelines, fracking and new exploration; unfortunately its causing energy prices rise and pinching those they govern. In response, it gives them an excuse to grow government and provide more redistribution, entitlement programs and welfare.
As the business cycle “expands” coming out of the pandemic and the economy reopens, the demand for energy rises and naturally outpaces supply (restricted already by left leaning politicians) which in turn benefit countries and companies profiting from gas and oil (Iran, Saudi Arabia, Russia, etc) … and still using coal (China). Existing domestic companies can’t produce enough energy so we import more, commodity prices and we are forced to import more (using tanker ships, rail and trucks). The herd trade is to buy those companies profiting. Hold too much in energy though, makes me nervous. I should just sit tight and let the tide lift my boat too … but I find myself itching to sell?
So if I’m going to sell, I might as well make the most of this urge and use it as an excuse to rebalance investments (really a good thing). I’m starting to shift from being overweight in high-dividend energy stocks to something more balanced ETFs and CEFs. Today my approach was to focus on adding a couple utilities $NEE, $XLU, $FUTY. Of course when looking at the holdings, they all hold the same thing as my current $VPU utility holding … which means I’m overweight in utilities now.
Next … it will be time to sift through the pile of funds and ticker symbols and decide just how many can be watched and are needed in the same portfolio – I already know several ETFs and CEFs duplicate the same balance of holdings.
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