I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Friday, January 25, 2008

About Diversification Strategy & Sector Rotation

One well-known principle of risk management in investing that we often heard is:
Don’t put all eggs in one basket”.

What it means is that in order to reduce risk, we should be well diversified in our investment by holding different stocks from different kinds of industries for our portfolio.

However, the question here would be, is holding different stocks from just any kind of different industries good enough to lower your investment risk or to produce satisfactory returns?

Peter Navarro in his book When the Market Moves, Will You Be Ready? offered a diversification strategy in relation to sector rotation as follow:


Traditional investor is taught that a well-diversified portfolio
includes stocks from many different at all times. In contrast, the savvy macrowave investor focuses on just a few sectors at any one time.


To the savvy macrowave investor, the traditional investor's
strategy of broad "sector allocation" is merely a recipe for very mediocre returns. This is because the traditional investor is always holding, at anyone
time, numerous weak sectors that are underperforming.

In contrast, the savvy macrowave investor looks for strong sectors to buy in an up market and weak sectors to short in a down market.
That means holding only a few of best-performing sectors at a time.
Moreover, the savvy macrowave investor regularly changes sectors as the stock market moves through the
patterns of sec­tor rotation



So, when you’re thinking to diversify your portfolio, you may want to take note of the above principle. This emphasizes the importance of understanding sector rotation.

If you’re interested to learn more about sector rotation, you can check out my previous post.

How to get some information about Sector Rotation?

The following links provide great articles on how to get info about Sector Rotation:

* Where To Get Sector Rotation by Simply Option Trading.

* Drilling Down on Sectors by Vix And More.

* Industry Strength and Weakness by Afraid To Trade.

* How To Find Strong Stocks by Afraid To Trade.

2 comments:

Tony Chai said...

Hi OTB :

Thanks for another informative article.

It's good to look at different trading opportunities & analyse them whenever they are presented (by you :) to us.

Thanks once again.. would grab hold of the book soon.

Yours Truly,

Tony Chai
Options Trading Blog

Tony Chai said...

Hi :

After reading up the information from the links that you've kindly provided, I've found that the industry group ranking (in colour graphical presentation) at Prophet.com very useful, ie.

http://www.prophet.net/explore/sectorPerformance.jsp?sortBy=1203552000000&orderBy=-1&interval=7&showPercent=false&period=3m

It allows me to have a quick glance which industry group is gaining strength and which industry group is faltering.

I have to research further to see whether this info has any relationship with earnings outcome.

Regards,

Tony Chai