Fellow blogger Jim who writes the Blueprint for Financial Prosperity blog writes about ETF and Mutual fund investing in his latest post. I am a big fan of ETFs and The Sleepy Portfolio, which I track, is composed almost entirely of ETFs. However, I have problems with many of Jim’s suggestions.
I don’t think average Joe should be a trader. Neither should average Joe chase “hot” sectors. In fact, all investing should bear the warning label: “Trading and chasing performance is injurious to your financial health”. I don’t think biotech is a hot sector right now (returning -10% annualized over the past five years), but energy certainly is. Should you buy the energy sector right now? Probably not. In fact, beaten-down biotech might be a better buy right now because biotech companies as a group are making new and exciting drug discoveries.
The Internet bubble should convince us of the folly of chasing performance. After reaching dizzy heights in 2000, technology as a group has returned an annualized performance of -19%. Put another way, a $10,000 investment would now be worth $3,500. In fact, beaten-down technology might be a good sector to invest now.
Please note that forecasting a future hot sector consistently is notoriously difficult. Think back to 2003 at the start of the Iraq war. Most analysts were forecasting that then high oil prices were a temporary phenomenon. Almost all oil stocks were trading at ridiculously low prices but today energy is a hot sector.
The bottom-line is investors should first create an asset allocation plan taking into account their personal circumstances and risk tolerance. The plan should be diversified into cash, fixed income and equities. Equities should be further diversified by market cap, geography and possibly style. Investments can then be made according to the asset allocation plan.