Investors have been told for decades that they need to apply sector investing in order to balance their portfolio across multiple sectors to achieve a good return. However, in these times of modern technology and high frequency trading, does this strategy still apply?
The theory is based on the concept of investing in sectors that counterbalance other sectors that are likely to underperform in order to balance out the portfolio. While on the surface this may seem like good advice, all it really does is limit the potential profits that are achievable because you are holding onto stocks in the portfolio that are falling.
This practice also leads investors to hold over diversified portfolios of 25 to 40 stocks that look more like a dog’s breakfast than a properly constructed portfolio. Anyone holding this many stocks in their portfolio knows that for the most part, one third is rising while the remaining stocks are moving down or sideways with the portfolio achieving average to poor returns but this needn’t be the case. If all an investor did is to exit stocks that fall away, they would achieve a much better return. In essence, smart investing is simply about buying what goes up and selling what goes down.
Right now, there is an influx of inexperienced investors in the market using apps to purchase stocks based on push notifications of what to buy. Unfortunately, this is resulting in a complete disregard for proper portfolio construction as the majority of their money is being invested in a small number of sectors, which is a very risky strategy.
From experience, I always recommend that you hold between 5 and 12 stocks and to only invest in stocks that have the potential to rise.
So what were the best and worst performing sectors last week?
Materials was the best performing sector up over 4 per cent with BHP, RIO and Fortescue Metals all rising strongly. Consumer Discretionary and Utilities was also up 2.68 per cent and 3.04 per cent respectively.
The worst performing sectors included the prior week’s big mover, Technology, which was down 3.58 per cent followed by Communication Services and Healthcare, which were both just in the green by 0.18 per cent and 0.33 per cent respectively.
Looking at the ASX top 100 stocks, the best performers were Alumina, which rose strongly by 12.85 per cent, Fortescue Metals was up 10.37 per cent while ALS Limited was up 9.14 per cent. The worst performers included technology stock Xero, down just under 3.66 per cent, which may be an indication that its stellar rise could be ending. Next was Woodside Petroleum, down 2.37 per cent followed by Newcrest down 1.32 per cent.
So what’s next for the Australian share market?
Once again, the All Ordinaries Index is still lacking any real direction, as it continues to trade up one day and down the next. Last week the bulls pushed the Australian market up slightly, as it closed 1.8 per cent higher, but it remains to be seen if this will continue to break the current sideways pattern the market seems to be in. Since 1 June, the Australian stock market has risen just over 4 per cent, as it is quite nervous given the US is now releasing second quarter earnings reports. If there is any bad news in these reports, we are likely to see the Dow Jones drop and a ripple effect flow on to our market.
I still believe there is time for our market to rise over the next few weeks to trade up to around 6,600 points and for the high to occur anytime in the next four weeks. That said, as I mentioned in my last report, if the bears take hold of the market, then we may have already seen the yearly high on 9 June and if this is the case we may experience further falls. For now, until the market picks a direction, it is best to exercise caution if you intend purchasing stocks.
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