The Only Constant is Change

The LPL market commentary article, The Only Constant is Change, is an excellent quick read that provides both a reminder as well context into how difficult it is to invest and why it’s so important to stay diversified.

Note how much each sector’s performance changed each quarter. There is a good lesson to revisit to not be like the typical investor and chase returns, which statistically has led to underperformance. There is a similar study that looks at Morningstar ‘Star’ ratings and the inverse relationship between a given star rating and the following 1, 3, and 5 year performance. The better the star ratings the poorer the performance was for the future is what the research paper had shown.

As Warren Buffet often does, I like to take a personal experience as an anecdotal point one can draw and learn upon. Sometimes returns can also vary with sectors over multi-year periods, in addition to quarterly periods like the First Trust article shows. I had enormous success beginning in2017 picking biotechnology companies, which is a subsector of the healthcare industry. After each successful year of outsized returns, I would accept I began to develop some hubris that I was decently skilled at doing so. Biotechnology did excellent as a sector for many years beginning in 2016 and peaked in early 2021. What happened since then is that the losses in those biotechnology companies over the 4 years zeroed out the gains I had experienced the previous 4 years.

It is another learning point not to get caught up in any fads, and to try and prevent yourself from getting FOMO (Fear Of Missing Out) –as it can lead to investment mistakes and costly learning point. Rather, it’s best to stay properly diversified and trust in the advice you are given even if it’s contrary to what you may be feeling. As my favorite financial author Nick Murray states: “All successful investors are goals-oriented and planning driven, and unsuccessful investors are market-oriented, and performance driven.”

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