How You Should Diversify Your Portfolio, According To A 50-Year Wall Street Veteran

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Marc Chaikin has worked on Wall Street since the 1960’s. In addition to years as a trader and broker, he’s also known for creating his own technical indicators and investing platforms, including those offered by his own stock research company Chaikin Analytics.

In 2016, $1 trillion moved from active to passive funds, according to Bloomberg. With that, more and more people are opting for broad index funds over individual equities. This generally leaves people broadly diversified, but unable to outperform the market.

So how does Chaikin, who’s just about seen it all, advise people diversify their portfolio?

It Starts From The Top Down

“I believe in diversification through sector analysis,” Chaikin said in an interview with Benzinga. “I start with a top-down view, look at price and relative performance. I also look at the number of stocks in a sector with bullish Power Gauge Ratings based on our 20-factor fundamental model [offered in his Chaikin Analytics platform] versus bearish ratings.”

Chaikin emphasized that the ability to compare stock ratings within a sector provides broad, yet comprehensive, insight into sector performance. In that way, he will get the diversification of the index funds or ETFs in the strongest sectors, without needlessly including underperforming sectors just for the sake of diversity.

“I analyze the 10 S&P Select SPDR Sector ETFs based on price performance and, more importantly, the potential based on the Power Gauge stock rating,” he said. “I have no problem underweighting or completely ignoring the weakest sectors. I like to find three or four sectors where price—actual and potential—converge and then identify the strongest stocks in those sectors. Reason being you can beat the ETFs, which are benchmarked to an index, by investing in the strongest stocks in these sectors. So that’s the way we approach the diversification problem.”

Chaikin cited an example of how Chaikin Analytics’ weekly sector analysis guided investors towards top industry performers over the second half of 2016 through the post-election rally.

“The Financial Select Sector SPDR Fund XLF has been strong since July when interest rates started to go up and the bond market peaked,” Chaikin said. “Anybody who was following our sector analysis on a weekly basis was alerted to the fact that the financial sector was outperforming through mid-March, 2017; and you wanted to look for stocks in the financial sector with bullish Power Gauge Ratings.

"So that led you to J.P. Morgan Chase & Co. JPM. It led you to Progressive Corp PGR, Ameriprise Financial, Inc. AMP, Allstate Corp ALL. It also pointed you in the direction of technology stocks because technology stocks have been strong for quite some time. At the same time, utility stocks were showing weakness. So simply tilting your portfolio towards the financial and tech sectors and away from the Consumer Staples Select Sect. SPDR XLP and The Real Estate Select Sector SPDR Fund XLRE sectors would enable your portfolio to outperform the indexes.”

How Active An Investor Should You Be?

On the subject of how to best take advantage of the ongoing bull market, Chaikin advocated for investors to take control of their own investments rather than rely on passive instruments or fund managers.

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While he endorses active management, Chaikin also recognized that time and confidence were important factors that could limit how involved some investors can be in their own portfolios. He emphasized that finding the right tools will help even the most novice money managers avoid stumbling between investments.

“If you’ve got some time, you can outperform,” he explained. “That’s what Chaikin Analytics is all about. The fact is that if you put in a little time to find stocks that have everything going for them, you can beat the market, and therefore, active management makes sense.”

“I lean toward active management because we give people the tools to manage their assets on an active basis and beat the market.” he said. “In order to be an active self-directed investor you have to have to rely on good tools rather than emotion. Because if you are just randomly shooting from the hip, responding to stories on the news, it’s not going to cut it.”

Chaikin Analytics is a sponsored partner with Benzinga. This article was written in conjunction with Chaikin Analytics, and may have been subject to their approval.

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Posted In: Financial AdvisorsEducationPsychologyTopicsOpinionPersonal FinanceInterviewGeneralChaikin Analytics
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