My investment world leads me to deal with many brokers and I am constantly amazed at the bad advice that is so prevalent in the financial industry. I think many brokerage houses remain conflicted, try as they might to be otherwise.Here is the latest example to reach my doorstep. We have personal assets with Charles Schwab (NASDAQ: SCHW) and they publish an in-house magazine for their clients called "onInvesting". In the summer 2009 issue listed under the heading of "Expert Insight" there is an article titled "How Sector Investing Can Work for You". I could not find a link to the story online. It is written by Brad Sorenson, CFA, director, Sector Analysis, Schwab Center for Financial Research.
The article discusses the advantages of investing in various specific sectors of the economy through Exchange Traded Funds (ETF). For people that want to focus on a specific sector because they believe it will outperform others, you're welcome to try and that may work well in many cases. What I find appalling is that the focus of the article is not directed toward the best way to use ETF's for this purpose, but it is focused on diversification and balancing your broad sector portfolio.
The story lists ten sectors of the economy: Consumer discretionary, Consumer staples, Energy, Financials, Healthcare, Industrials, Information technology, materials, Telecommunications services, and Utilities. It actually states "If you look at the percentage of your equity portfolio that you have allocated to each sector and compare regularly with the S & P 500 Index - approximately quarterly - you'll be ahead of the game"
The truth is that if you are going to buy all ten sectors and rebalance periodically then you should just buy the S&P Index itself. This can be done in a fund or using ETF's. Why go to the trouble of paying all the brokerage fees and management fees (over and over) to replicate the Index which can be acquired for less money and less work?
Schwab and Mr. Sorensen are offering their clients bad advice!
The idea of investing in sectors or buying ETF's, or having a diversified portfolio is fine. However, the notion that you should pay a higher price by breaking the index apart to mimic the collective is dumb! They might as well tell you that if you want to buy 100 shares of a stock you should buy it in 10 share increments so that they can collect more fees.
By the way, one of the things I love most about Exchange Traded Funds, is that I can invest in low cost Vanguard funds instead of the house funds and that is what we have done in our Schwab account. You might ask why we have the Schwab account ---- well, that has to do with diversification.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.
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Reader Comments (Page 1 of 1)
6-03-2009 @ 4:13PM
e.krabs said...
Is it possible that perhaps they meant only a few certain sectors at a time rather than all or most of the sectors? If it's less than the breadth the market, then it would make sense to focus on sectors, as market index funds would not be able to achieve such a portfolio.
Plus, perhaps they also mean to buy certain sectors when they are down? Of course, the entire market is taking a beating, but for those with good risk tolerance, financials are particularly beaten.
I don't personally care for this method of investing, but from what I've read on sector-based investing, I can see where they are coming from and agree there might be some validity to the method.
Of course, I can't be sure since we don't have the article link in question.