Sectors, Diversity & Risk

I’ll keep this brief. I just read Othalan’s portfolio review and he (she?) mentioned a concern about being heavily invested in the tech sector. The sense was that the lack of diversity was tantamount to increased risk. Risk is a big concern for him.

Ken Fisher, an investment adviser who runs a firm in his name, is all about sector rotation. I don’t know enough about his strategy to intelligently criticise it. In fact, if I knew more, maybe I wouldn’t criticise it at all. I accept that he’s done a lot of research in order to back up his claims. But to me, it’s just as TMF has their “buy and hold” mantra, Ken has his sector rotation mantra.

I don’t pay attention to sectors and I no longer consider buy and hold the key to long term success. I pay attention to individual companies. At present, with few exceptions the performance is predominantly in the tech sector. There’s a reason for that which I will not delve into. Hopefully most readers of this board have an understanding of why this is so.

How long will this be true? I will venture a guess: at least another 20 years. I won’t attempt to explain my reasoning, in fact, it’s not my reasoning. Go find writings and videos of Ray Kurzweil, Elon Musk, Jeff Bezos, Jack Ma, Bill Gates, etc. All these guys are way smarter than I am. Yeah, their opinions are biased, but that doesn’t make them wrong.

I’m not saying that there isn’t money to be made outside of the tech sector. I hold LGIH, BCO and a tiny, tiny speculative position in IIPR, all three are non-tech. LGIH has proven to be profitable, I’ve not held the other two long enough to reach a conclusion.

All I’m saying is that diversifying your portfolio is in no way a guarantee of outsize returns or of risk reduction. If you’re diversified in under-performing companies, irrespective of the sectors you are invested in, you will fail to maximise your returns. It’s not any more complicated than that.

The other issue is risk. I wrestle with this. I am not very familiar with hedging tactics. I have a rudimentary understanding of options and kind of know how to use them to reduce risk, but at the same time I’m loathe to use them for this purpose. To my way of thinking, hedging is a way to guarantee reduced returns. I seldom trade options, but when I do it’s generally because I perceive a slam-dunk, short term profit potential. To date, I’ve made more money with options than I’ve lost, but it’s all been small potatoes.

My approach to risk reduction is to be attentive (like daily, even while on vacation) and do everything I can to keep my emotions in check. I can’t tell you yet how well that’s working. I’m still pretty new to this game.

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brittlerock: I’ll keep this brief. I just read Othalan’s portfolio review and he (she?) mentioned a concern about being heavily invested in the tech sector. The sense was that the lack of diversity was tantamount to increased risk. Risk is a big concern for him.

Brittlerock, yes, “he” is appropriate. Name is David if you are curious, I’ve just been forgetting to sign off that way.

Just to be clear, I have absolutely no concern related to my tech heavy investments. I have simply know it is a typical concern and periodically have people note my tech heavy portfolio. I wanted to comment on my different view on sectors as this was one of the topics I considered over the course of this year. Diversification to a certain extent is good yet it must be applied intelligently. Over-diversification can the potential for high profits. Overly broad diversification actually increases risk by ensuring some portion of the portfolio is going down. My point, possibly not clearly stated, was that I am quite satisfied with my own diversification as I have come to see traditional sectors as a bad way of defining portfolio content for the purpose of diversification.

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