Will the Strait of Hormuz be open and stable?
Where will oil prices settle?
Will the current conflict in the Middle East spark major action from nations like Russia or China?
The Piton Investment Team understands that answers to questions like these can mean a significant differences for at least certain areas of the market, so Piton clients can understandably wonder about the impact on their portfolios. While the Piton Investment Team does not know, and will not attempt to predict, the answers to those geopolitical questions, the volatility of the past quarter has prompted them to reflect on a valuable tool for keeping portfolios less susceptible to the level of uncertainty in the world.
That tool is diversification.
In nearly any discussion of portfolio management, there is bound to be reference to “diversifying” the portfolio, but not necessarily explanations of what it means to balance a portfolio this way. Because, in managing Piton portfolios, the Team maintains a commitment to prudent diversification, let’s take this moment to illustrate one way to understand diversification. The chart linked below features sectors (“market segments”), color-coded and ranked by their annual returns over the last twenty years, plus a column ranking those same sectors by their annualized returns over those entire two decades: AssetAllocationDiversification–20YearsoftheBestand-
WorstMFS
The color coding makes it immediately visible that no single sector is overwhelmingly or consistently the best performing over the years. Indeed, the best performing sector over the two-decade span was the worst-performing sector one year (Large Cap Growth in 2018) and the worst performing sector over the two-decade span was the best-performing sector one year (Commodities in 2007). There are professional benchmarks for the “weighting” of sectors (and other metrics) in portfolios. Our Team’s goal is to make selections that will generate returns for our clients greater than that of the benchmarks.
Answering important questions in periods of volatility is challenging, but the collective experience of the Piton Investment Team reinforces their belief that “a moderate position, applied with selectivity and prudence” is the best perspective to maintain during such times.