Back in college, I had an awesome opportunity to volunteer coaching youth soccer.
It was a blast to teach these 8- and 9-year-olds who had no idea what soccer was.
We taught them to run together in a line and pass the ball between each other — as opposed to everyone massing around wherever the ball happens to be.
But after our first game, I noticed a trend we needed to work on.
These kids had a nasty case of tunnel vision.
When one of them would get the ball, they‘d look down at their feet and lose awareness of their surroundings.
They couldn’t see anyone coming at them from the sides or behind. They could lose the ball or make a bad pass because they were focused on the wrong thing.
At the next practice, we taught them to keep their heads up and look for openings.
And we trained them to attack the same weakness in other teams. While opponents were staring at their feet, our players would swoop in from the sides and steal the ball.
It worked great.
Using the tactic, we won the league in my first — and only — season as a coach.
I bring this up today because young kids playing soccer aren’t the only ones who suffer from tunnel vision… investors do too.
But there is a simple way to overcome that shortcoming that can lead to greater profits.
Spreading Out Your Wealth Isn’t New
In 1952, economist Harry Markowitz penned a dissertation that changed portfolio management forever.
“Portfolio Selection” discussed risk and how to mitigate it within portfolios using diversification.
The idea was that having a stock portfolio spread out among different industries and sectors carried less risk than “putting all your eggs in one basket.” The essay introduced the idea of Modern Portfolio Theory which was based on two concepts:
- Investors want to maximize return for any risk level.
- Risk can be reduced by diversifying holdings through individual, unrelated stocks.
So rather than loading up just on, say, emerging market stocks — which can be volatile — you can mitigate that risk with stocks from less-risky sectors of the market.
You can still hold a high-risk asset, so long as other holdings in the portfolio help mitigate that risk.
This idea earned Markowitz the Nobel Prize in Economic Sciences in 1990 and remains a staple in portfolio management today.
It all boils down to diversifying your portfolio rather than having investor tunnel vision.
Don’t Get Caught With Tunnel Vision
One of the biggest issues for investors and diversification is understanding where to look.
I get it. There are thousands of stocks out there.
But what if I told you my friend and colleague Adam O’Dell has already done that heavy lifting for you?
Let me explain.
In 2006, the total annual return of the S&P 500 was 15.8%.
During backtesting of Adam’s Infinite Momentum Alert service, he identified stocks in multiple different sectors that beat the S&P 500’s annual returns… in just four weeks:
- Metal industry: A.M. Castle & Co. (CASLQ) — 16% gain from December 24, 2005 to January 21, 2006.
- Food & Beverage industry: BRF SA (BRFS) — 2% gain from December 24, 2005 to January 21, 2006.
- Material Construction industry: PW Eagle Inc. (PWEI) — 2% gain from August 5, 2006 to September 2, 2006.
It was similar in 2018, only the S&P 500 lost value with -4.28% in total returns for the year.
Again, Adam’s system found different stocks in different industries that blew the doors off the broader market… in just four weeks:
- Apparel industry: Ever-Glory International Group Inc. (EVKG) — 8% gain from March 3, 2018 to March 31, 2018.
- Downstream Energy industry: Valero Energy Corp. (VLO) — 3% gain from March 31, 2018 to April 28, 2018.
He has essentially created a diversification engine. Each month, the AI-driven system behind Infinite Momentum Alert targets the best 10 stocks for that trading period.
Sometimes it may pick up on a broader mega trend and focus more of the portfolio on a specific sector, but it diversifies by hitting on multiple sectors and industries.
And if there’s a mega trend that has legs, the system may tell Adam to hold tight and keep certain stocks in the portfolio. (That just happened with homebuilders, and Adam closed out of two positions — one for a gain of 33% in just under four months, and another for a gain of 25% in just under three months!)
Adam’s Infinite Momentum strategy takes the guesswork out of diversification and helps you cut out investor tunnel vision.
On Friday, February 9, Adam is rebalancing the Infinite Momentum Alert model portfolio. He’ll see what the system says, and then tell you what 10 stocks are set for market-beating gains in the coming weeks. Now is the perfect time to join up and prepare for Friday’s trades.
Be sure to click here now to learn more about how this simple strategy is a perfect fit for your own investing toolkit as 2024 continues.
Until next time…
Safe trading,
Matt Clark, CMSA®
Research Analyst, Money & Markets