Guess right with men’s college basketball champ Duke Blue Devils? Think the Golden State Warriors will take it all this June in professional hoops? If you’re among the millions of fans who systematically try to pinpoint winners before the big games, consider that similar strategies can also apply to your stock picks.
Consider how you make your sports selections. Is it by your intuition or a team’s cute mascot? Or by researching previous match-ups and outcomes?
Perhaps the best investment strategy I ever heard of that didn’t work in the long run was that of the Beardstown Ladies. Similar to those who pick teams with cool logos, the Beardstown Ladies of the mid-1990s bought stock in companies that made products the women used in their homes. If the ladies liked a household cleaner, for instance, they pooled funds and bought stock in the manufacturer.
This group of small-town Ohio ladies, once told to leave investing to their men, claimed initial returns exceeding 23%. So does this approached rooted in inconceivable common-sense (to quote the title of their investing book) actually work?
What do you think? The Ladies’ audited results resembled those of my friends who pick sports teams based on uniform colors and mascots: sometimes lucky and other times wretched.
Maybe you devote a great deal of time and money to your picks both on the field and in the market. You’re not alone. Again to cite sports, in 2000 the National Football League’s Washington Redskins decided to field the best players available, at an amazing price tag.
The team boasted the (supposedly) top players in every critical position and entered the season with its toughest decision being where to place the Lombardi Trophy after winning the Super Bowl. That season, these great individual players finished last as a team.
When individual players dominate, teams often fail. When you play the market based solely on what cleans your counters best, your real returns might in fact lag market indexes such as the Standard & Poor’s 500. That was sure true of the Beardstown Ladies’ performance when auditors picked apart the group’s ballyhooed claims.
Your portfolio and retirement savings must respect the value of teamwork and research. Sure, we all try to buy into strong companies that enjoy good prospects for success. Just as your basketball team can’t consist of players of only position – no matter how good each player is individually – you should invest in more than one market sector.
The S&P index comprises nine sectors of stocks: technology, financials, health care, consumer discretionary (such as entertainment and restaurant companies), industrials, consumer staples, energy, utilities and materials. How are sectors doing, based on mutual funds that track them? Who’s going for the championship?
The year-to-date return on the Select Sector SPDR exchange-traded fund (XLY), the ETF representing consumer discretionary stocks in the S&P 500, is up 6.9% in trailing total returns. The energy sector ETF (XLE) is up 1.2%, the financials ETF (XLF) is up 1.4% and so on.
On some days, one sector (think health care, as of late) takes off; on other days, the same sector tanks. As most are up right now compared with 2014, who wins?
You, if you diversify your holdings. You can’t predict with certainty the market’s ups and downs any more than you can, without a miss, always guess which way a ball will bounce.
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Joseph “Big Joe” Clark, CFP, is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at [email protected], or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
Securities offered through and by World Equity Group Inc. Member FINRA/SIPC. Advisory services can be offered by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
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