Sector Diverse Stock Market Investing

This is a little teaser from the draft myBook: 

Sector Diverse Stock Market Investing

Stephen F Agnew, Principal Scientist Emeritus

2025aug17 draft

I began managing ourPortfolio upon retirement 3.5 yrs ago when I finally realized how a simple portfolio of etfs could just follow the market. Since then, I have been pleasantly surprised by how well both the Market and economy have grown along with my strategy. I developed and applied a sector diverse strategy that included 15% etfs to ourPortfolio and the most surprising thing about sector diverse investments is the very large dispersion of returns. Returns vary by as much as 70% for one rsd for high roi sectors with a sector diverse strategy. That is, over just one year some issues may gain as much as 170% while others may lose -80%, making buying and selling decisions difficult for not only profit taking from high gainers but also for when to sell big losers. Therefore ourPortfolio follows ourBenchmark with holdings that have done very well as well as with holdings that have done poorly. This large dispersion is a result  my limited ability as a retail investor to pick winners based only on past pricing and volume of past performance. After all, once a stock loss has occurred, taking that loss by selling may or may not make sense since future performance may improve. A retail investor must therefore only take losses after careful evaluation of potential future gains.

Sector diverse stock Market investing is a strategy for retail investors like me to build portfolios that will grow when the economy grows and yet necessitate a maintenance turnover of only 10%/yr. Building ourPortfolio over the last 3½ years required me to learn new skills and what I have learned should help other retail investors build their own portfolios as well. It is very useful to have a portfolio of stock market investments to capture a fraction of economic growth since portfolio wealth grows as long as the economy grows. The sector diverse portfolio holds a distribution of stocks across the 11 sectors of the economy as well as holdings across etfs, foreign, and smallCaps. The global economy grows and investors overbuy as a result of demographics and as a result of innovation, but the economy also cycles and also shrinks as a result of corrections that involve investor overselling. A sector diverse portfolio investment strategy must then allow for the ups of growth as well as the downs of Market corrections and the ups and downs of investor sentiment about those Market ups and downs. Retail investor sentiment varies with life stage and income as well as how the stock market cycles vary portfolio value even though portfolio growth is a result of both stock market rally and correction cycles. A portfolio grows or shrinks with the economy because of the stock market cycles up with rallies and down with corrections. 

Expert investment advisors recommend any number of different strategies for short or long term growth, but for the retail investor, poor investment advice still represents the greatest risk for less than optimum portfolio growth. For example, most advisors call Market corrections risky even without selling any holdings. This is especially poor advice. It is far better advice to simply accept and follow Market cycles risk as part of diverse sector investing from individual stocks comes from poor management or Market changes or any number of factors and not from Market corrections.

A friend of mine describes his investment strategy from his grandfather who told him to sell stocks with the market goes down. The basic idea was to sell before the Market went all the way down and then to buy back in when the Market recovered. This strategy did not seem very useful because the market cycles are really not very easy to predict. Selling a holding because it is dropping in value is really not a good strategy just like buying an issue because it is increasing in value. Another common strategy is to simply buy and hold stocks for companies that you somehow really believe in. Once again, retail investors depend on the Market pricing for their buying and selling decisions and so holding stocks forever also makes little sense.

Sector diverse investments limit buying and selling decisions to a 10%/yr turnover that then provides a 10-20%/yr cash rotation from profit taking. Cash rotation from profit taking during Market tops is then for personal expenses as well as for buying opportunities during Market bottoms. Sector diverse investing emphasizes limiting buying risk to 2%, taking profits above 10%, holding sectors with good rois but also holding sectors to provide a good dispersion in rois. A retail investor depends on Market prices and volumes that follow myBenchmark for at least 2-3 Market cycles.

There are eleven or so stock market sectors spread among largeCaps, etfs, foreigns, and smallCaps and a sector diverse investment portfolio will reflect those sectors that have a good returns on investment (rois). These good roi Market sectors are also good across etfs, smallCaps, and foreigns and there are literally hundreds of books on all kinds of different market strategies, some effective and some not so effective. All effective strategies, though, have diverse sectors and since successful investors adopt market strategies that prove effective, those effective strategies become part of the Market. Market growth occurs over time with cycles of rallies and corrections for literally thousands of stocks.

Since expert investors for institutional investments adapt and use strategies that demonstrate success, advisors often tell retail investors to simply follow those expert institutional investor trends. However, expert institutional investors make most of their money from client fees and do not really follow the Market with optimum returns. Expert advisors convince investors to accept lower returns overall in order to avoid paper losses during corrections, which are not real losses. Institutional investors make most of their money from fees, but also make 20-30% of their income from constantly churning institutional portfolios ostensibly to avoid the risk of paper losses during corrections by accepting less than optimum gains during rallies.

The goal of diverse sector retail investing is to build portfolios with good rois that follow the Market rois with 10%/yr turnover and 10-20%/yr cash rotation. However, the holdings will show a dispersion of sector returns as well as total returns. It is not possible for a retail investor to only buy stocks with positive returns, but it is possible to buy a dispersion of stocks with good average returns.

All a retail investor can hope is to on average follow the Market returns, sometimes leading the Market by +2% and other times lagging the Market by -2%. MyBook will show how the sector diverse strategy works for the retail investor. Here is a plot that shows the large ytd sector dispersions of myPortfolio and it is no wonder that retail investing challenges many people...