Dec 15
Sector Portfolio: Stop Deceiving Yourself
This past weekend I ran a test to see how well a “sector only” portfolio is diversified. For the “sector only” portfolio I pulled out the nine Vanguard sector ETF and ran a portfolio analysis. The projected return was 8.8% with a risk factor of 17.3%. The Diversification Metric (DM) turned out to be a mere 21%.
Next, I supplemented the nine sector ETFs with eleven of my top ranked stocks. These stocks come from my “Creme List” of stocks. Do keep in mind that the percentage in the sector ETFs changed from 11.1% to 5%, a big difference. By adding the stocks to the ETFs, the projected return increased from 8.8% to 9.7%, a significant jump. Two more changes also moved in the right direction. The risk factor, as measured by standard deviation, dropped from 17.3% to 16% and the DM move up from 21% to 38%. Adding stocks greatly improved the diversification of the portfolio.
If someone says you can create a well diversified portfolio through sector investing, ask them to prove it. What appears to be a well diversified portfolio at first glimpse may not turn out to be what you want.
Lowell Herr
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