The media occasionally locks in on a particular "hot" sector. In the late 1990s, it was technology. In the mid-2000s, it was mining.
Writing about fashionable sectors is one thing. Building sustainable investment strategies around them is another.
Finance journalists tend to write lots of articles about industries or sectors because these stories fit a current narrative. In the tech stock boom, it was the information revolution. In the mining boom, it was the rise of China.
Of course, the changes in the global economy brought about by innovations in digital technology and communication is a real story, as is the impact of China because of its rapid industrialisation and global integration of the past 17 years.
The big question for investors is what information about those trends can you act on that is not already reflected in share prices? Too often, people end up trying to jump on a train that has already left the station.
In the Australian share market, for instance, mining stocks boomed last decade amid voracious demand for coking coal and iron ore from steelmakers in China, the world's largest producer and consumer of steel.
From mid-2003 to mid-2011, the Reserve Bank of Australia's index of commodity prices roughly quadrupled in value.
By 2012, new iron ore supply was coming online just as China's expansion started to slow and steelmakers' demand moderated. Spot iron ore prices fell by nearly 80 per cent from a record US$180 (NZ$266) a tonne in 2011 to about $40 by late 2015.
The market prices of mining stocks followed suit. On the Australian market over the four years from 2012-2015, many of the worst-performing stocks were either iron ore mining companies or companies that serviced that market.
While iron prices recovered a little since then, bringing mining stocks with them, many of these stocks still lagged the wider market's performance over the past six years.
This story is a powerful argument for the virtues of diversification. The more concentrated the portfolio, the more it is exposed to these distinctive events beyond the control of an individual investor.
Diversification involves spreading risk and diluting the influence of sector-specific themes. Just as materials stocks struggled from 2012-15, other sectors such as healthcare and telecoms and financials did well. Resources bounced back in 2016, while healthcare, telecoms and financials lagged.
The fact is that trying to forecast the best performing sector or industry from year to year is a mug's game. Observing that commodity prices are rising again is not useful information for you as an investor because that's already reflected in the market.
What's useful for you as an investor is having a financial adviser who relies on academic research shown to be sensible, persistent across different periods, pervasive across markets and capable of being cost-effective.
Over the years, we've seen investors chasing "hot" sectors/industries and getting fingers burnt.
At Stewart Group through diversification, discipline and maintaining a level of flexibility, we can help ensure that a single sector doesn't have a disproportionate influence on your investment outcome.
• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.
