Diversification
By Saghir Aslam
Rawalpindi, Pakistan

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)

If investors ever needed a demonstration of the benefits of diversification, they got one in the second quarter. After a prolonged period in which market gains were concentrated in a handful of large growth stocks-firms such as Microsoft and America Online-the tide turned in April. Out-of-favor sectors, such as small-cap stocks and cyclicals, moved to the front on the pack. Investors with exposure to these sectors benefited. Those who chased the first quarter winners-tilting toward large-cap growth-ran the risk of lagging behind.

Part of the explanation for this can be found in the US economy, which continued to deliver strong growth. This brightened the 1999 outlook for earnings, a big plus for small caps and for value stocks-those selling for bargain prices relative to their earnings.

The ticker tells the tale: While the large-cap S&P 500 Index posted a 7.05% return in the second quarter, the Russell 2000 Index-a leading small-cap measure-returned 15.55%. Similarly, the Russell 1000 Value Index returned 11.27%. Its growth stock counterpart, the Russell 1000 Growth Index, returned 3.85%.

Even more astonishing, was the explosive recovery seen in many of the foreign equity markets battered by last year’s currency crisis. The Emerging Markets Free Index returned 24.40%-making it one of the quarter’s best performing benchmarks.

But all this good news was too much for the Federal Reserve, which nudged a key short-term interest rate higher. Worries about inflation-and the Fed-contributed to another difficult quarter for bond investors. Bond prices fell, pushing yields higher. The Aggregate Bond Index posted a -0.32% loss for the quarter.

As those developments show, today’s investment winners easily can turn into tomorrow’s losers. While it may be tempting to “give up” on a particular industry, stock or sector when market trends are moving against them, it’s useful to keep in mind just how quickly those trends can change. You must always keep focused on diversification.

Adopt a disciplined, long-tern approach that includes portfolio diversification and stick with it. Whatever happens in the market, do not deviate for your plan unless the circumstances change entirely.
I hope this message for diversification is clear. This is the key for long-term success. During the last quarter stocks such as paper companies, that have been dormant for a long time, posted the largest gains. On the opposite side of the coin, internet stocks that have been the leaders were laggard.

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)

 

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Editor: Akhtar M. Faruqui
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