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The Times They Are A Changin', Making The Case For Diversification

In declaring that "the first one now will later be last," Bob Dylan probably wasn't referring to portfolio management, but the wisdom of his words is why he was awarded the 2016 Nobel Prize in Literature.

Image source: https://www.flickr.com/photos/badosa/9488661840/

This chart illustrates the genius of Dylan's aphorism about today's laggards becoming tomorrow's leaders, applying it to the impact of rebalancing a hypothetical diversified portfolio invested across the Standard & Poor's 10 industry sectors.

The sectors are ranked by their 2015 performance, which are shown in blue. The purple bars show 2016 returns for the same sectors.

In 2015, the sector to come in last was energy, which suffered a 21.1% loss. In 2016, energy was No.1, the leader in the 10 sector race. It's what Dylan described in his 1964 classic, "The Times They Are A Changin'".

The unpredictable nature of investing wasn't what Dylan had in mind, but rebalancing a portfolio to keep up with changing times was a good move for investors in 2016, as shown in this illustration. So rebalancing at the year-end of 2015 would have added to diversified portfolio returns in 2016.

Rebalancing would have meant buying the biggest losers of 2015 - energy, for instance - to make up for its diminished influence in the diversified portfolio.

The second and third biggest losers in 2015 were companies in the raw materials sector and utilities. They both were strong performers in 2016.

With Donald J. Trump being sworn in today as the 45th President of the United States, it was a reminder that the times are always changing, and it highlighted the wisdom of diversification and rebalancing.

The Standard & Poor's 500 index closed Friday at 2,271.31, down a fraction for the week, but up by three-tenths of 1%.

According to Reuters, it was the first time in more than 50 years that a new commander-in-chief was welcomed by a stock market gain on his first day in office.

If you want to be sure you are rebalancing your portfolio properly and preparing strategically for the changing times ahead, please contact us.


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This article was written by a professional financial journalist for The Dover Group and is not intended as legal or investment advice.

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