Key insights
- The author notes that sector-based diversification failed as assets moved in tandem due to shared sensitivity to macro factors like interest rate changes. This highlights the importance of understanding the underlying drivers of company earnings beyond sector labels. A more granular approach to diversification, focusing on independent business drivers, is suggested. This implies that broad market factors may override sector-specific performance, potentially leading to underperformance of diversified portfolios during periods of macro volatility.
I always felt like I was doing a decent job diversifying. I had companies from different sectors, different sizes and some international exposure.
Last year something strange started happening. They still moved together a lot, especially around rate changes. It did not matter if it was tech, industrials or even some consumer names with the same reaction, same direction.
It helped me see that I was diversifying by labels not by what actually drives the business. If multiple companies are subject to similar macro conditions or capital costs they are probably not as independent as they appear.
And so since then I have been trying to think more about what really moves each company’s earnings and less about sector buckets.
I am curious how others here approach this. Do you think about what actually drives the business or mostly stick to business level analysis?