diversification

United Technologies serves the aerospace and construction industries. These are highly cyclical businesses, and fears of a long recession caused the stock to fall 54.7%, from $82.50 in 2007 to $37.40 in March 2009. Since then, the stock has regained a third of this drop. We feel United Technologies has more gains ahead. That’s largely because all of its companies are market leaders with strong brands and loyal customers. As well, a new restructuring plan puts the company in a good position to rapidly increase its earnings when the economy begins to recover. UNITED TECHNOLOGIES CORP. $51 (New York symbol UTX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 942 million; Market cap: $48 billion; Price-to-sales ratio: 0.9; WSSF Rating: Above Average) has six main businesses: Carrier makes heating and air-conditioning equipment (25% of 2008 revenue, 17% of profit); Otis makes and services elevators (22%, 32%); Pratt & Whitney makes aircraft engines (22%, 27%); Hamilton Sundstrand makes electronic controls for aircraft (11%, 13%); UTC Fire & Security sells burglar alarms and fire-protection services (11%, 6%); and Sikorsky makes helicopters (9%, 5%). The U.S. government is United Technologies’ biggest customer, and accounts for about 13% of its yearly revenue....

UNITED TECHNOLOGIES CORP. $51 (New York symbol UTX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 942 million; Market cap: $48 billion; Price-to-sales ratio: 0.9; WSSF Rating: Above Average) has six main businesses: Carrier makes heating and air-conditioning equipment (25% of 2008 revenue, 17% of profit); Otis makes and services elevators (22%, 32%); Pratt & Whitney makes aircraft engines (22%, 27%); Hamilton Sundstrand makes electronic controls for aircraft (11%, 13%); UTC Fire & Security sells burglar alarms and fire-protection services (11%, 6%); and Sikorsky makes helicopters (9%, 5%). The U.S. government is United Technologies’ biggest customer, and accounts for about 13% of its yearly revenue. We feel that United Technologies’ diversification is one of its major strengths. All of its businesses are leaders in their industries. Plus, the company sells products to both original-equipment manufacturers and aftermarket customers. That cuts its risk. For example, when demand for new planes is weak, airlines will probably buy more replacement parts instead of new aircraft. When the economy improves, aircraft makers will order more new engines and electronics. This will offset lower sales of spare parts....

Here are four classic, profit-killing errors that all investors make from time to time. All can seriously hinder your stock market returns. 1. “Averaging down” without reconsidering whether you should have bought in the first place. Many investors have made lots of money by “averaging in” to the stock of a well-established, well-managed company — that is, buying more as funds became available over a period of years....

Lately, a number of readers have been asking me whether it’s worth holding onto their U.S.-stock holdings if the U.S. dollar keeps falling. Some wonder if they should follow their brokers’ suggestions and hedge against the risk of a drop in the U.S. dollar, using options, futures or other investment products. If you knew that the U.S. dollar would keep falling, the best portfolio management strategy would be to sell all of your U.S. stocks and buy them back when the dollar stabilizes. However, you don’t know where the U.S./Canada exchange rate is going next — you never do. The financial industry has a variety of products that can insulate your U.S. investments from a drop in the value of the U.S. dollar. These products obviously cost you money. In addition, they reduce the long-term value of your U.S. investments. After all, you invest in U.S. stocks for two key reasons. One is that the U.S. stock market offers certain types of investment opportunities that are rare or non-existent in Canada, such as giant multi-national consumer companies like Procter & Gamble or McDonalds. The other key reason for U.S. investment is that it gives you currency diversification. That’s crucial to a sound portfolio management strategy....

Every investor would like to find an easy-to-use market indicator that tells you when to buy and when to sell. Some look to technical analysis as a way of determining this. Technical analysis is the process of analyzing a stock’s past price movements in an attempt to determine its future price. It’s not concerned with financial statements, management or anything else that underlies a company’s business. It only studies how stock prices have behaved in the past, and the clues that could offer about future stock-price movements. In fact, an investor who uses only technical analysis might buy and sell a stock while knowing little or nothing about the underlying company. ...

You need to look at each conglomerate on a case-by-case basis. Here are some examples: Power Financial holds majority interests in Great-West Lifeco and Investors Group. We see both Great-West and Investors Group as buys. However, Power Financial also has a large stake in Pargesa Holding S.A. of Europe. Pargesa, in turn, has large interests in a group of major European media, energy, utilities and specialty minerals companies. We don’t have the same confidence in these holdings as we do in Great-West Lifeco and Investors Group. So we think investors should stick with Great-West and Investors Group — the highest-quality segments of Power Financial’s holdings. We don’t recommend Power Financial....

If you knew that the U.S. dollar would keep falling, the best way to protect yourself would be to sell all of your U.S. stocks and buy them back when the dollar stabilizes. However, you don’t know where the U.S./Canada exchange rate is going next – you never do. The financial industry has a variety of products that can insulate your U.S. investments from the risk of currency depreciation. These products obviously cost money. In addition, they reduce the long-term value of your U.S. investments. After all, part of the appeal of investing in U.S. stocks is that it provides currency diversification. I’m not convinced that the U.S. dollar will continue to fall. The Canadian dollar has moved up from under $0.80 U.S. in January to about $0.90 today. That’s partly due to a rise in commodity prices, particularly oil. But it’s hard to imagine that commodity prices will get anywhere near their 2008 highs this year, or even in 2010. So, a continued rise in our dollar (or a fall in the U.S. dollar against the Canadian dollar) seems unlikely, because of our relatively greater economic dependence (compared to the U.S.) on resource industries....

If you knew that the U.S. dollar would keep falling, the best way to protect yourself would be to sell all of your U.S. stocks and buy them back when the dollar stabilizes. However, you don’t know where the U.S./Canada exchange rate is going next – you never do. The financial industry has a variety of products that can insulate your U.S. investments from the risk of currency depreciation. These products obviously cost money. In addition, they reduce the long-term value of your U.S. investments. After all, part of the appeal of investing in U.S. stocks is that it provides currency diversification. I’m not convinced that the U.S. dollar will continue to fall. The Canadian dollar has moved up from under $0.80 U.S. in January to about $0.90 today. That’s partly due to a rise in commodity prices, particularly oil. But it’s hard to imagine that commodity prices will get anywhere near their 2008 highs this year, or even in 2010. So, a continued rise in our dollar (or a fall in the U.S. dollar against the Canadian dollar) seems unlikely, because of our relatively greater economic dependence (compared to the U.S.) on resource industries....

Theme funds are funds that focus on investments in broad areas, such as alternative energy, health, science, resources or whatever. These funds often suffer from pseudo-diversification. That is, they have lots of different stocks in their portfolios, but these stocks all respond to the same economic factors. What’s more, many theme-fund managers gravitate toward speculative stocks and recent new issues, two areas that harbour more than their share of disasters. That’s especially so when the theme comes out in response to a boom in the theme where it wishes to invest. Of course, theme funds can prosper for months or years. But they rarely generate enough profit to justify their underlying risk. We don’t recommend any of the four alternative-energy funds we analyze below....

We continue to recommend that all investors own at least two of Canada’s big-five banks – Bank of Montreal, Royal Bank, CIBC, TD Bank and Bank of Nova Scotia. These are key safe investments for a portfolio. But these should not be the extent of your financial holdings. It is also essential to diversity within each economic sector. Other types of financial investments, such as non-bank financial companies, should play a role in your portfolio. Non-bank financial companies include property and casualty insurance companies, mutual fund companies, wealth management companies, mortgage lenders and more. It also includes life insurance companies. The best of these can be safe investments in a well-balanced portfolio. Recently, Canadian life-insurance stocks have been held back by investor concerns that the recession will continue to hurt their profits....