When I wrote my regular column in the local paper, I wrote and annual feature called the Halftime report offering a summary of some investment and economic data for the first half of the year. The last halftime report I wrote was back in 2007 just before I sold my business. Back then the markets around the world were strong and bonds were correcting as interest rates were rising. My contrarian advice to take profits and rebalance your portfolio diversification at the end of the article was a case of accidental perfection as the financial crisis hit in 2008.
Around the world in 6 months
This year there has been a mish-mash of performance (all data comes from Morningstar Paltrak 2011) from different market benchmarks. The MSCI World index started the year strong with a 3% gain in January but had a tough June and returned a lot of the gains to finish with a modest return of 2.6% for the first 6 months.
Markets in France and Germany were top markets in the first 6 months with solid double digit returns of 13.0% and 11.8% respectively. At the other end, Asian markets all experienced losses in the first half of 2011.
Canada was also flat
The TSX finished the first 6 months with a 0.2% gain. A strong performance in February (4.4% gain) was offset by a poor June (-3.3% loss).
If we look at the different sectors of the TSX, Health care, REITs and Telecommunications were strong while energy mining and materials posted losses for the first 6 months.
| TSX Sector | 6 Mth Ret |
| S&P/TSX Capped Cons Disc TR | -0.9% |
| S&P/TSX Capped Cons Staples TR | 4.7% |
| S&P/TSX Capped Diversified Mining TR | -3.4% |
| S&P/TSX Capped Energy TR | -1.2% |
| S&P/TSX Capped Financials TR | 6.0% |
| S&P/TSX Capped Health Care TR | 20.6% |
| S&P/TSX Capped Industrials TR | 9.6% |
| S&P/TSX Capped Info Technology TR | 2.6% |
| S&P/TSX Capped Materials TR | -9.7% |
| S&P/TSX Capped Real Estate TR | 9.2% |
| S&P/TSX Capped REITs TR | 14.6% |
| S&P/TSX Capped Tele Services TR | 14.4% |
| S&P/TSX Capped Utilities TR | 1.9 |
How does this data help us?
So the winners of the first half was Health care and Europe. The losers was precious metals and Asia. Moving forward, it may appear sensible to keep your winners and turf the losers but be careful because anything can happen in the next six months. I’ve always said, the worst strategy is to keep chasing performance as the probability for long term success is low.
The key to success is to build a portfolio of diversified investments. If you think about it, a proper portfolio diversification will have both winners and losers. Check out my post yesterday on The Science of Building a diversified investment plan to learn more about the science of investing.
Diversification has been a long standing principle of investing. The problem with portfolio diversification is it has been treated more like an art than a science. For most people diversification is more about quantity rather than efficiency. It’s not about how many investments you own. In most cases, you can optimize a portfolio with 5 to 12 investments. The science of investing says the key is to have a properly allocated investment plan and then having the discipline to stick with that plan.
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Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.
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Actually, the science of diversification is called modern portfolio theory, and from the summaries I’ve read, it’s got little to do with buying different stocks or different mutual funds. Instead, proper diversification consists of a specified percentage of your portfolio in each of cash, equities, reits, and bonds. Diversification is not having 12 different mutual funds, because all that means is you’re fully invested in the stock markets. You need a specific percentage of the other types of investments because they’re either not correlated, or negatively correlated.
Hi Glenn,
You are correct that the science of diversification is about efficient asset allocation. You can check out the link http://retirehappyblog.ca/the-science-of-building-a-diversified-investment-plan/
I think its fairly well proven at this point that index funds are pretty much all the diversification you need in terms of equities (maybe some sector ETFs if you want to get fancy). I know they make an investors life easier. All I have to worry about is accumulating more capital and the returns will come.