Most investment strategies stress one of two approaches. One of these is to chase after the action; that is, buy and sell often, in hopes of getting into markets or sectors that are rising and getting out with some of your profit intact, or at least with limited losses. The other, the one we favor, is to diversify your holdings and emphasize high-quality investments.
A lot of successful, experienced investors have learned through experience that chasing the action carries costly drawbacks. For one, you can wind up paying a lot of money in commissions and sales fees. For another, losses can mount quickly when the action dies down soon after you buy. Anyway, by the the time ‘the action’ is clearly underway, much of the current year’s profit has already been made.
If you buy a diversified, balanced portfolio of mostly high-quality investments, you’ll likely avoid the heart-stopping losses that come to those who buy just as the action reverses, when a rise suddenly gives way to a fall. But you should also profit from a combination of reinvested distributions and dividends, limited losses in bad years and healthy long-term gains. All it takes is an emphasis on investment quality, the desire to hold a balanced, diversified portfolio, and the patience to wait for the action to come to you.
Let it come to you
One sector in which chasing the action may cost you dearly right now – at least in the shorter term – is the health-care sector. That’s why we advise you to go easy on health-care funds such as TD Health Sciences. Health-care funds were strong market leaders last year. During this time, the average health-care fund posted a mouth-watering return of 38.3 per cent. But we don’t expect these funds to post similar gains this year in 2014. Though the long-term outlook for health-care stocks is encouraging, there are a number of factors that could topple these high-flying shares in the near term, including continuing patent losses and headwinds caused by the Affordable Care Act in the U.S.
If you diversify and balance your holdings, on the other hand, you’ll be in a position to let the action come to you. Take the resource sector, for example. Certain sub-sectors in the resource area have been definite laggards this year. In particular, gold stocks plummeted last year, though rebounding some towards the end of last year / beginning of this year. Metals and mining stocks were down about 24 per cent over the same period. But energy stocks, on the other hand, have climbed about the same rate as the overall market.
Mind you, investing in the resource sector now requires patience and is not without risk. After all, the carnage in the sector is a consequence of slow global growth. And it may take some time before the global economy strengthens enough to cause a strong rally in resource shares. But patient, contrarian investors may be well rewarded for waiting.