Investments

The Importance of Diversification

By Dean Barber

December 8, 2017

It’s December 4th as we record this and what an interesting month we had in the month of November.

But before we get to that I just want to say that I hope you’re having a wonderful holiday season with all of your family members and I hope that this holiday season brings you the joy you want to have.

Back to business here. So, November was an interesting month. We had records set, good returns pretty much across the board although some sectors didn’t do quite as well as others, and a lot of things were being manipulated in the market by, you guessed it, Tax Reform.

Tax Reform

There has been a lot of drama surrounding Tax Reform. It’s almost like watching Comedy Central when you turn on CNBC, CNN, Fox Business, or Fox News because you’re getting such far-reaching comments as to what this Tax Reform is going to do from both sides of the aisle, the left, and the right.

I want you to take a look at our article from last week called Tax Reform: What First In, First Out (FIFO) Means for Investors. We would really like you to reach out to your senators so that it doesn’t become part of the final bill. Essentially, it is all about stock sales and what the Senate version of the bill wants to do is basically force you to sell your oldest shares of stock first, therefore, realizing the highest capital gain potential and not getting to pick and choose the shares you want to sell. There are a lot more details on that here.

Diversification

So with that, what I want to do is not focus on Tax Reform – I don’t want to focus on politics, I want to spend just a few minutes talking to you about the importance of diversification. We preach diversification on a consistent basis. What diversification really means is that we don’t know, you don’t know, and there isn’t an expert that knows exactly what sector of the market is going to do the best. Is it going to be financials, technology, health care, or energy? And should we own the S&P 500, Dow 30, or what about the NASDAQ? All of those things move in different ways.

So, let me just take a few moments and show you what diversification really so far this year, and more importantly, here this last month.

Let’s get to work here on diversification. Let’s start with a year-to-date look at what different sectors did.

Chaikin Analytics – https://www.chaikinanalytics.com/

As you can see, the clear winner year-to-date is Technology, followed by Health Care, Materials, Consumer Discretionary, Financials, and the S&P 500. I have a few of them highlighted here and what I want to point out to you is Technology is the clear winner on a year-to-date basis.

Chaikin Analytics – https://www.chaikinanalytics.com/

In fact, if we take a look at this chart we can come up here into April and see that the Technology sector (Yellow Line) was off the charts. Especially as it compares to Financials (Light Blue Line) all the way at the bottom. Financials have spent most of the year at the bottom. This may cause you to think, “Why in the world would I want to own Financials in a world where Technology is doing so much better?”

Chaikin Analytics – https://www.chaikinanalytics.com/

However, if we look at the last month. When we look at the last month what we see is that Financial have now all of the sudden made a huge rebound. What’s the lagger in the last month? It is Technology.

We don’t know at what point in time which sector is going to perform the best. That’s why we can’t have only one sector inside of your portfolio. We have got to have some diversification. Yes, we make tactical adjustments, but we never bet 100% on one sector over another. If we were to do that, we could miss quite big. Now let’s look at how the major indices have performed this year.

Chaikin Analytics – https://www.chaikinanalytics.com/

If we take a look at the different indices so far this year it shouldn’t be a surprise that the NASDAQ composite is once again at the top of the charts because the NASDAQ is a very technology-heavy index. NASDAQ is followed by the Dow Jones Industrial Average and the S&P 500. The S&P 500 for the first time in many years is lagging behind the Dow Jones Industrial Average.

Chaikin Analytics – https://www.chaikinanalytics.com/

Although, again if we take a look at the last month what is really gaining traction? Well, it’s SmallCap once again. It’s SmallCap and the Dow Jones Industrial Average, and down at the very bottom, we have the NASDAQ.

Does this mean that we’re seeing a rotation away from technology because it’s had such a huge run-up since last year’s election or is it simply an indication that there’s no real way to know exactly what index or what sector we should own at what point in time? Therefore, really stressing again the importance of diversification.

One thing is certain, that Tax Reform bill is going to pass. We will have a version hit us sometime either before Christmas or the end of the year. That’s really going to shape what sectors are going to do well next year. It will cause us to step back, do a little bit of reallocation, and look at the different areas where we should be overweighted. Once again, we’re never going to be all in one sector.

With that, I want to take the opportunity to thank you for joining me. I won’t be speaking with you again by video until January so I hope that you have a very wonderful holiday season.

As always, make sure and reach out to your advisors here at Barber Financial Group, and if you’re not a client you’re always welcome to come in for a great second opinion of where you stand today.

Dean Barber

Founder & CEO

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Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.

The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.