Why Sector Diversification Is Important

Posted by on

Allocating assets among various sectors is one way to implement the diversification strategy. This is because the sector that earns the best returns in one year might end up turning the worst the following year. For example, the below chart shows the annual sector returns of the S&P 500 index from 2013 to 2022. We can easily see that not one sector is the consistent best performer year after year.

Energy for instance had the best returns in 2016 but in 2017 it was the second worst performer. Similarly the sector plunged heavily in 2020 when the Covid-19 pandemic hit and had a loss of 34%. The following year however energy rebounded sharply and was the best sector in the S&P 500 with an astonishing return of 54%. Energy again surprised many investors in 2022 when it earned the highest sector returns of 66%. The sector is not having a great run so far this year. It is the second worst performer with a loss of 5.5% after utilities.

Annual Sector Returns of the S&P 500 from 2013 to 2022:

Click to enlarge

Source: Thrivent

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • SPDR Consumer Discretionary Select Sector SPDR Fund (XLY)
  • SPDR Consumer Staples Select Sector SPDR Fund (XLP)
  • SPDR Energy Select Sector SPDR Fund (XLE)
  • SPDR Financials Select Sector SPDR Fund (XLF)

Disclosure: No positions

On the Performance of Auto-Parts Retailers Stocks

Posted by on

One way to profit from the growth of the automotive sector is to invest in auto parts companies. This includes auto parts markets and retailers. Auto makers are not a great investment especially for the long-term due to many issues including legacy obligations and other factors. Auto parts makers and retailers benefit benefit during good and bad times. During normal periods, consumers depend on them for regular maintenance and during recessions people tend to hold on to their existing vehicles longer which inevitably requires parts maintenance and replacement.

The biggest of the three auto-parts retailers in terms of market capitalization is O’Reilly Automotive Inc (ORLY) which has a market cap of over $56 billion based on Friday close. The next top firms are Autozone Inc (AZO) and Advance Auto Parts, Inc.(AAP). AAP is the smallest with a market cap of just under $4 billion.

O’Reily stock is the top performer so far this year with a return of over 10%. Autozone is flat. But Advance Auto Parts has plunged by nearly 58% as shown in the chart below:

Click to enlarge

Source: Google Finance

The following chart shows the 5-year returns:

Click to enlarge

Source: Google Finance

In the past 5 years also AAP has been the worst performer. Autozone beat Advance Auto with a return of 220%.

AAP had poor earnings in the first quarter and also slashed its dividend. Consequently its stock had the largest single-day decline ever in May. The company missed its second quarter earnings miss and lowered the forward guidance. With major management changes announced including the replacement of the CEO, it will be a while before AAP recovers. Given its past performance it will be a hard slog. From an investment perspective it is better to avoid AAP.

Disclosure: No positions

Why Tactical Asset Allocation is a Not a Smart Idea: Chart

Posted by on

One of the key strategies for success with investing is the simple task of diversification. I have written many times in this blog that diversification is the easiest way to reduce risk and improve returns. Diversification over various asset classes is one way to implement diversification in a portfolio. The following chart shows the importance of diversification using returns from the UK market as published by Vanguard:

Click to enlarge

Source: Vanguard UK