True Diversification Enhances Total Return

Author and economist Peter L. Bernstein once wrote, “Diversification is the only rational deployment of our ignorance.” Which begs the question: What exactly is the optimal level of diversification to dilute our ignorance but not our performance?

In 2002, Morningstar analyzed the returns of large company stock mutual funds. They segmented the funds into six categories according to the number of stocks owned in each portfolio. The most concentrated portfolios held 10 to 20 stocks, while the least concentrated held more than 100 stocks. Results were measured over 10 years. The best-performing category? Portfolios holding 10 to 20 stocks. My experience proves what the research suggests: More is not necessarily better. When we own a few great companies across broad economic sectors, we will generate excellent returns over time.

This column has advocated owning shares in companies of industry leaders. Since economic sectors are made up of numerous industries, it is important for us to understand if we have too much or too little exposure to a particular sector to ensure proper, real diversification in our portfolio. To do so, I go to Fidelity Investments’ website, fidelity.com, then click on “research” and click on “stocks.”

Click here to read more: The Arizona Republic

Buy Stocks in Each Sector to Take the Volatility Edge Off Your Portfolio

Years ago, my husband and I worked for the same global-investment-management firm in the same West Coast office. One day, the decision was made to close that office and move our team across country to New York City.

We didn’t want to move but because we both worked for the same firm, we didn’t exactly have a choice. Had we diversified our employment and, therefore, our primary source of income, we would have put ourselves in a much stronger position to make the best decision for our family.

We ignored the cardinal rule of investing: diversify, diversify, diversify.

But rarely do investors understand what it means to be truly diversified. Simply owning shares in various companies will not provide real diversification if, for example, those companies are all in the same industry or economic sector. Diversification is actually about how different investments perform in various economic scenarios. Or to put it another way: Selecting investments is not so different from how we select our friends.

Each one of my friends exhibits an overriding attribute. Some are great in a crisis. Others are fun to be around when times are good. I have friends who like to exercise and those who prefer the theater. Supportive friends and the kind who are scarce in times of difficulty. Like you, I have different friends who shine in different seasons. The same is true of stocks — certain stocks do well when the economy is thriving and others outperform when the economy is soft.

Read more here: The Arizona Republic

 

Two Very Different Companies with Very Similar Valuations–Which One Should You Own?

Investing is like an essay exam rather than a multiple-choice quiz. Essay answers are more nuanced than multiple-choice — more like an informed judgment call than the unassailably right answer. As a professor, I give my students essay questions because they create a complete picture of what young scholars know and don’t know.

Similarly, investing, like real life, rarely presents us with questions that are as straightforward as those on a multiple-choice test. That is why I am interested in investing in the stocks of well-managed, industry-leading companies; I don’t have to know “the answer.” I simply need the confidence that management is moving the company in the right direction no matter the short-term trends of the market. These companies won’t always generate positive returns, but the dominant ones in each industry have a much better chance of succeeding than the second- and third-tier companies. I also know I increase my odds of success if I select the most attractively priced stocks with the greatest potential for total shareholder return.

Let’s examine two leaders in two very different industries with similar price-to-earnings (p/e) valuations.  Click here to read my column in its entirety: The Arizona Republic

Dollar-Cost Averaging is a Prudent Investment Strategy

If you are a toe dipper or an inch-er when it comes to getting into cold water then you understand dollar-cost averaging.  A prudent strategy in rising and falling markets. Below is my latest column.

Perhaps by now you’ve compiled your stock “watch” list. Presumably it contains the names of companies whose products or services you admire.

In his book “One Up on Wall Street,” fabled growth investor Peter Lynch advises that the average investor can produce enviable returns just by looking for companies with products they know and use every day. Lynch goes on to say, “Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”

Let’s take heart in his words as we press on.

Most likely you are wondering if you should be investing now, with every headline screaming that the market has hit historical highs. Many individual investors fear that just as they are jumping in, the “smart money” is jumping out.

Read more here:  The Arizona Republic

Remember: The Stock Market is a Tug of War Between Fear and Greed

If there is one thing you need to remember about investing, it is this: The stock market is a tug of war between fear and greed.

Whenever possible, we want to buy from fearful sellers and sell to greedy buyers. My experience confirms that the best time to buy a stock is often when investors are running for the exits. It is also the hardest time to do so. That is why I keep a watch list of stocks I want to own (yes, I really do keep a list and so should you) and do my best to learn a great deal about the company before I make a purchase.

Read the rest of my column here: The Arizona Republic

Why Dividends Matter in the Long-Haul

Last week’s column on dividends offering the best indicator of company performance prompted a reader to ask an excellent question: Why don’t we hear more about dividends on the financial news networks? Frankly, because they just aren’t very exciting — like watching paint dry or tortoises race or glaciers melt.

The rest of my column can be read here:  The Arizona Republic