Let's tackle the toughest market we've ever experienced since inception of our portfolio. This is one that gets clubbed routinely, regardless of good earnings that companies print out, regardless of a stellar un-employment report that normally would send stocks more than 2% higher. For weeks and weeks now, virtually all sectors have come down tens of percentages from their 52-week highs, except one sector that is the commodities. Why can't we own nothing but the oil stocks? How about a portfolio with a solid collection of oils, natural gas, pipelines and a couple of oil services company: an all-oil portfolio? What is it with this diversification non-sense?

Unfortunately, becoming an all-oil fund is a recipe not for a great year, but for a disastrous one, even though the year may start out seemingly as easy as stealing candy from a baby. The reason? You must think about it like this. What happens if Putin all of a sudden withdraws troops from Ukraine and floods the world with oil, because he can't pay the price for the sanctions anymore? What happens if the U.S. reaches a nuclear deal with Iran, allowing the country to flood the oil market with new supply? If any of these happens, crude oil could drop 10-20% in a heartbeat. 

That's why you don't put all of your eggs into one basket; you need to diversify. Around this time last year, as I just got to know the stock market, I started out with a portfolio full of "companies of the future." Whether it was "the future biggest electric car maker of China" (NIO), the "future company of artificial intelligence" (Palantir - PLTR), the "future of air transport" (Archer Aviation), the "future of biotechnology" (Bionano Genomics - BNGO), what all these companies had in common was they all had zero earnings and burning through millions of investors' cash every quarter. In the months leading up to when we started buying these names, the names actually performed tremendously well: NIO was an $8 stock in July 2020 and was at $60 in January 2021, BNGO went from a penny stock to $15 in a couple of months, and PLTR went from an $8 - IPO to a $25 stock with no earnings. However, when everyone started to love them, it turned out that was the time to get out, not get in. When NIO hit $60, higher than expected inflation numbers stoked fear in the stock market that the Federal Reserve would stop its money-printing program and start to tighten monetary policy, something that we've discussed multiple times, further discounts the future cash flow of long-duration assets (see this post). NIO quickly dropped from $60 to $30 in a couple of months, and a year later, it's trading in the high teens. BNGO is now back to a dollar, and PLTR is back to the low teens. That's what happens when you don't diversify, you end up with a basket of beaten-down high valuation stocks like Cathy Wood's ARK Invest. That's why today, we're not an all-oil portfolio even as we see the Russia-Ukraine tension drive the prices of crude oil from $80/barrel to $110 in two weeks' time.

It's wishful hindsight after the move. Yeah, with my portfolio down a few percentage points for the year, I do wish I own nothing but the oils. I do wish I own no industrials (you see that group being clubbed). I do wish I just own a handful of tech (they're down tens of percentage points). I do with I own zero financials (Morgan Stanley is down 21% from its 52-week high). Sadly, I could never have predicted the future and get it right. And I don't think any professional money manager can either. It's a game of statistics: the chance for one sector to go wrong is definitely higher than the chance for multiple sectors going down. With diversification, by being in multiple sectors, I don't have to get 100% of my picks right and could still outperform the broader markets. One or two sectors could be down, but the remaining ones are okay. However, if I don't diversify and only invest in one sector, stocks of the same group, when something goes wrong, all will go down together. Certainly, that's what happened to one of my first investment portfolios, I blew it up after just a couple of months. Having learned the diversification lesson the hard way then, now, for the WIC portfolio and other portfolios under my management and advisement, all have been outperforming the S&P 500 (not down as much). The WIC portfolio, which we display for you to see, is only down 3% compared to the S&P 500 which is down ~10% for the year.