One of the most overlooked parts of investing is constructing a portfolio which is well balanced and thought out.
Many investors want to concentrate on specific areas of the market and in doing so, expose themselves to situations which can lead them to be vulnerable if that sector performs poorly.
Energy bust
Clearly, with the energy sector under pressure for the last six to seven months because of falling oil prices, anything with a lot of exposure suffers in these kinds of declines.
Conversely, a portfolio which is too diversified spreads capital too thin. So essentially you have no concentration in any area which you believe in.
With our Long Term GARP portfolio, we are making bets on the strength of the consumer, both domestically and globally.
Recovery
With the drop in oil prices, you would think some of these specific companies will benefit from more discretionary spending dollars available.
In my opinion, energy prices will take some time to recover, likely the rest of the year or even potentially two to three years.
Big oil
We do have some energy exposure in the Long Term GARP model though BP Plc. (BP).
That’s intentional because, in my opinion, sticking with the large integrated oil names is a safe way to own energy.
A few of our companies have yet to report their fourth quarter results, and it will be interesting to see if lower energy prices did indeed help their prospects.
In January, the Long Term GARP Portfolio returned 1.2%, besting the S&P 500 which lost 3.0%. The Concentrated GARP strategy did not fare nearly as well, losing 4.2%.
Photo Credit: Mike Mozart via Flickr Creative Commons
DISCLAIMER: The investments discussed are held in client accounts as of January 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
