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When I started out in this business, you were either a “stock guy” or a “bond guy.” And if you were a “stock guy,” then you were either a “growth guy” or a “value guy” (Oh sure, there were a few “small-cap” guys here and there, but you could tell there was something not quite right about them). And if you were a “bond guy,” you were either a “treasury guy” or a “corporate guy.” We didn’t realize it at the time, but as it turns out, us “guys” had it much easier back then. You picked your niche and there you were. That was your “thing.” And while there were obvious limitations to being a “value guy” and nothing else, it also offered the opportunity to focus and specialize in a particular area. Today, as you are undoubtedly aware, things are, how shall I say – a tad different. To say that there have been some changes in the investment industry over the past quarter century would be an understatement of gargantuan proportions.

Back in the day, an investor would study a potential investment for days, weeks or months before finally deciding to call his broker (on this thing plugged into the wall called “the telephone”) and place an order to buy. And once the position was taken, the investor knew he was in for “the long haul.” Nowadays, if an investor wishes, he or she can buy rubber futures in Shanghai, sell short the Aussie Dollar/Japanese Yen cross rate on the FOREX, enter a butterfly option spread on the S&P 500 at the CBOE, and just for old time’s sake, “buy a stock,” in under a minute with a matter of a few mouse clicks.

To put it mildly, the game has changed. And as with most things in life, there is some good and some bad associated with all of this.

On the one hand, there is something to be said for getting very good at some “thing.” Let’s face it, that’s how most people succeed in life. If you ask somebody what they do for a living, most people don’t say “I an electrician, and oh, I’m also a biochemist.” The more you are able to focus on “something,” whatever it may be, the better chance you have at getting good at it. At the same time, opportunity lies around every corner for those who are prepared to take advantage of it when it exists.

Specialization vs. Diversification

So the good news is that investors are no longer limited to focusing in just one area and have the ability to participate in any variety or style of investment. The bad news is that too many people spend too much time trying to look at “everything” and end up bewildered at the vast array of possibilities, rather than focusing in an area and getting really good at it. You see the conundrum. There are benefits to “specializing.” There are also benefits to “diversifying.” So which one is best, specializing or diversifying?  Ah, there’s the rub. Because that is a question that each investor can only answer for him or herself.

The interesting fact is that there are still people who “specialize” and who do quite well for themselves. Of course, there are also people who “diversify” and find opportunities in a variety of places. The primary advantage to “specializing” is that it affords you the opportunity to maximize your long-term profitability by focusing your talents in the area that best suits you personally. The disadvantage to specializing is that there is no one approach that always makes money. Thus, as a “specialist” you will have to accept the fact that there will be times when you will have to “ride out” a tough time. If your niche is small cap value stocks, the fact of the matter is that there are times when this category of stock will simply go out of favor for a while, and that money making opportunities may be hard to come by during that time. Still, that doesn’t mean that such a focus won’t perform well in the long run. It just means that a little patience may be required from time to time. And let’s face it, patience is one commodity that seems to be in short supply these days.

The primary advantages to branching out is that you have more opportunities to make money and also, you may be able to reduce the volatility of your overall portfolio by making money in one thing while something else is going through the inevitable drawdown. This alone can help keep many individuals in the game long enough to profit over time. The disadvantage is that there are almost too many choices out there to choose from.

The best advice seems to be to consider branching out but to do so very slowly and very deliberately. In other words, don’t just trade something “because you can.” Trade something because you feel you have a definite edge.

An Organized Approach to Branching Out 

For those of you are inclined to branch out, Table 1 displays a list of ETFs that I follow. This list is by no means all-inclusive but it does cover a lot of ground in terms of looking at the landscape of the markets at any particular point in time. This list includes:

• Four U.S. Stock Market Indexes
• Four International Stock Market Indexes
• Four Bond funds
• Four Commodity related funds

Table 1 – ETFs in different categories

Chart 1 – Stock Indexes Rally most of 2007, then sell-off

Chart 2 – TLT (Upper Left), IEF (Upper Right), SHY (Lower Left), HYG (Lower Right)

Chart 3 – Commodity ETFs rally while stock market declines

Summary

There is opportunity everywhere. Whether you choose to specialize or to diversify is entirely up to you. The important thing is to make a well thought out decision based on what you think will work best for you based on your own temperament, tolerance for risk, time available to devote to the task at hand, etc.

And hey, let’s be careful out there.

To search for previous articles written by Jay Kaeppel, please click here.

Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site

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