Your 2 Cents Are Blocking You From Enormous Gains
When you think of the market, think of your reserved, elderly family member at the end of the Thanksgiving table. As one side quarrels with the other, Grandpa Joe just wants someone to pass the gravy.
That’s because he’s heard it all before. Many times. And Grandpa Joe (just like the market) doesn’t care. He understands that no degree of impassioned discourse will change the way things are.
They just are.
So today, we want to discuss how — as investors — we can all benefit from shutting up and passing the gravy.
Missed Opportunities
It’s not uncommon for people to let their worldviews dictate their investments. It’s human nature … but it’s also inflicting self-harm.
Take, for example, unwavering proponents of renewable energy. Is it the future? Absolutely. Eventually the world will be powered by carbon-free sources, perhaps sooner than Earth reaches a literal boiling point.
However, rather than treating your portfolio like you treat your science-denying Aunt Karen at Thanksgiving, an open-minded approach would’ve allowed you to allocate some funds to profitable fossil fuel stocks or oil-leveraged ETFs like the Energy Select Sector SPDR Fund (XLE).
Over the past three years while everyone in Washington pointed fingers at each other over surging gas prices … oil majors like Exxon Mobil (XOM) and Chevron (CVX) posted their highest profits of all-time.
But the idealistic fossil fuel divestment crowd missed the party because the only petrochemicals they support are the ones they’re unaware of in their running shoes.
Consequently, since the COVID-induced market bottom in March 2020, they overlooked:
- CVX’s 173% gain.
- XOM’s 239% gain.
- And XLE’s 246% gain.
Performance chart showing CVX’s 173% gain (orange), XOM’s 239% gain (dark blue) and XLE’s 246% gain (light blue) since March 20, 2022.
Now, the flipside.
Aunt Karen’s scowling across the table as Little Greta explains pronouns, the electric power production capacity of solar energy and the millions of gallons of oil saved each day by electric vehicles (EVs).
But thanks to a steady diet of Facebook memes and misinformation, Karen’s convinced that solar panels and EVs are part of some insidious Marxist plot to turn America’s youth into gender-neutral woke warriors.
Accordingly, Aunt Karen missed out on the 518% gain First Solar (FSLR) posted since March 2020, and the 775% gain Tesla (TSLA) produced over the same period.
Performance chart showing FSLR’s 518% gain (orange) and TSLA’s 775% gain (blue) since March 20, 2022.
There’s a reason the old adage, “Opinions are like a$$holes. Everybody has one and they all stink,” is still applicable today. To maximize profit potential as an investor, it’s best to check your perspective at the door.
Because the market (like Grandpa Joe) doesn’t care. Instead, we need to understand how to …
Diversify for Success
Portfolio diversification is an integral component of a successful investment strategy.
And just like you should diversify the asset classes in your portfolio (e.g., between stocks, ETFs and bonds, with strategies like the 70/30 or 80/20 allocation), you should also diversify within those classes.
We know, Aunt Karen. That’s more diversity than you’re comfortable with. But bear with us for a moment …
As an example, let’s use stocks, which can be divided into growth stocks (those that can outperform the overall market due to their future potential, but which experience higher volatility) and value stocks (those that pay strong dividends and are generally more stable in price).
The two can hedge against each other. For example, in 2022 when the S&P 500 fell 19%, it was the tech sector (growth stocks) that took the hardest hit while the energy sector (value stocks) was the only sector to produce a double-digit gain.
Fast-forward to the first half of 2023 and the newly emerging bull market, and it’s now tech leading the way with energy lagging.
However, instead of enduring boom or bust cycles, investors who diversified their holdings to include stocks at both ends of the spectrum were able to enjoy steady gains while the outperformers offset losses from the underperformers.
That’s the key for buy-and-hold investors. Because over longer timeframes, the right stocks in the right sectors can, together, make your portfolio stronger.
TL;DR
The market doesn’t care about your opinion. By not considering investments that don’t align with your viewpoints, you’re only failing yourself. Don’t be Aunt Karen. Don’t be Little Greta. Just pass the gravy and diversify your portfolio. Grandpa Joe approves.
Resources
- Learn which of the S&P 500’s 11 sectors are outperforming.
- Seven diversification strategies to help your portfolio.
- Forbes’ 10 best value stocks of 2023.
Forbes’ 10 best growth stocks of 2023.