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Bob Carey
Chief Market Strategist
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  Don’t Abandon Diversification Because Of A Bad Experience
Posted Under: Broader Stock Market • Commodities • Conceptual Investing
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  1. The time periods referenced in the chart were selected specifically to capture two rallies in the price of crude oil with each period sharing a starting price of $80 per barrel.
  2. Crude oil rose from $80 to a record-high level of $145 from 9/26/07-7/3/08. The price increased from $80 to around $97 from 9/26/11-8/21/12.
  3. Despite the fact that oil surged approximately $65 per barrel from 9/26/07-7/3/08, the refiners actually saw their stocks plummet by an average of 47.4%.
  4. As a result, the return on the broader S&P 500 Energy Index was only 10.7% in that period. The returns on the remaining subsectors ranged from 4.8% to 48.8%.
  5. Fast forward to 9/26/11-8/21/12 and you see where the price of oil increased $17 per barrel. This time, however, the stocks of the refiners were up 67.9%, on average.
  6. As a result, the return on the broader S&P 500 Energy Index was 20.3%, nearly double the return posted a few years earlier when oil rose nearly 4 times as much in price.
  7. The refiners outperformed the other subsectors, which posted gains ranging from 10.6% to 22.9%.
  8. Diversification works. And while aberrations occur from time to time, it's best not to overreact to them, in our opinion.
Posted on Thursday, August 23, 2012 @ 12:06 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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