Is It Time to Buy Straw Hats?

Winter officially arrives in a few days even with parts of the country already experiencing wicked cold weather.   Who needs a straw hat in the winter?  With little demand for straw hats prices will drop.  Buy low?

Bernard Baruch made a fortune buying stocks during the Great Depression when buyers were few.  He said, “Buy your straw hats in the winter.”  Mr. Baruch was shrewd at finding value amongst the ruble.

The momentum trade is in full force as investors try to catch up to the winners.  Investors have been running through the airport terminal trying to catch an airplane already in the air.  

Financials, energy and industrial stocks have soared since the election.  Small-cap stocks have also performed well.  Money is flowing into these red-hot sectors at the expense of stoic utility stocks and boring bonds.  It’s possible an eager investor may have sold investments down 5% and bought investments up 20%, a difference of 25%.  Buy high?

Does it make sense to buy unloved sectors?  Should you buy utilities and bonds?  The thought of buying bonds today will make most people feel sick.  Why buy bonds when interest rates are rising?  One reason to buy bonds and other despicable sectors is to get a better purchase price.  Another reason to buy dreadful sectors is because markets change quickly. 

The chart below from Dimensional Fund Advisors shows no one investment sector has stayed at the top or bottom for long.   Looking at the best performing sectors from 2001 to 2015 only Real Estate Investment Trusts held the top spot for more than one year, 2010 and 2011.  Take a moment and look at 2015.   The best performing sector was International Small Cap stocks while the worst performing sector was Emerging Markets.  Can you guess what these two sectors are doing in 2016?  They have flipped spots with Emerging Markets at the top and International Small Caps at the bottom.

What now?  Is it prudent to chase the best performing sectors?  It would be wise to stay with a diversified portfolio of investments so you can participate in all markets, a strategy that works well in all climates.   If you’re suffering from FOMO, then it would be best to dollar cost average into these fast-moving markets so you don’t get scorched when markets turn.

“It wouldn’t be prudent.” ~ Dana Carvey (or George Bush)

Bill Parrott is the President and CEO of Parrott Wealth Management.  www.parrottwealth.com

December 12, 2016