Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Friday, June 4, 2010

Broader is Often Better

Clients often come to us with portfolios invested in specific sectors and specific countries. Such investments can be quite good but need to be handled with care. They often smack of market timing. More often than not, investors read of the latest hot sector or country to invest in. They decide to buy, often at quite high prices. When the investment loses its luster and reverts to a more sensible price, losses occur.

If the investor is knowledgeable of the country or sector and follows it closely, setting a price at which to sell and sticking to it, it may be a turn out to be a rewarding strategy. If the investor has an advisor who is very knowledgeable of the investment and can advise on when to sell, then this too may provide a positive end result. Or, if the investor expects the country or sector to have good long-term prospects and plans to hold the asset for many years, then such narrowly-focused investing can be successful.

If, on the other hand, you are flying by the seat of your pants, chasing the latest “hot assets”, then your specific sector/country investing is likely no different than market timing, which we say time and time again, is “very tough to do”. It’s tough to do because you have to be right twice, when to buy and when to sell. Being right once is tough enough to do. Being right both times is very difficult to do, particularly when your emotions often work against you.

For these reasons, we think most investors will do better to concentrate on using broadly diversified mutual funds. With international investing, we recommend avoiding global funds and country-specific funds. Assuming you have domestic funds in your portfolio, we prefer you avoid global funds which also include U.S. stocks. It’s easier to manage your international allocation if you use international funds that don’t include U.S. stocks.

As for investing in specific sectors, we think the average investor will generally do better by sticking to widely-diversified, low cost, tax-efficient funds. In many cases, we recommend focusing on index funds and exchange-traded funds (ETFs) within defined asset classes. You’ll only need to occasionally add to or sell a bit of these holdings to adjust them to your target allocation. Doing this will keep transaction costs and taxes to a minimum and eliminate the need to try to time market prices.

If you believe you are smarter than the average investor, then such country specific and sector funds may be right for you. Nevertheless, we suggest you check your ego at the door and honestly evaluate your investment acumen. For most investors and perhaps you too, we believe broader diversification is often better, requires less effort and less worry.


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