INVESTING: Don’t be so diversified that you miss the next big thing

Your portfolio is getting thumped lately, but at least you’re taking solace in the fact you bought a few energy stocks over the summer. You feel you have followed the prudent course of advisers everywhere and diversified enough to stay out of trouble. Think again! This is not garden-variety correction, and what we are seeing is just a warm-up for what’s to come.

Conventional wisdom from advisers is that you can’t time the market, so don’t try. Instead, spread your eggs around so you’re not open to a big hit in any one place, and hope that as something falls, something else will go up to more than offset the loss.

The part about avoiding a big hit in one place is true, but the rest of it doesn’t make for a successful investing plan. Look at what has happened to your portfolio so far in October. Everything you own is down. Bonds, oil, stocks-asset classes across the board are negative this quarter. Diversifying only offered you a wider selection of losers to choose from.

Energy stocks were popular even before the hurricanes hit. By late September, sentiment surveys were showing bullish readings of more than 95 percent on oil stocks, which means everyone who could possibly buy them already has.

It’s pretty easy to guess what happens to price when there are no buyers left. OIH, the exchange-traded fund that holds 20 energy stocks, is down more than 15 percent in the last two weeks.

The 1970s put America through some nasty bear market periods. Stocks and bonds both experienced heavy losses for years at a time. Following the advice of your financial professional would have yielded 10 years or more of pain and suffering.

There was one asset class, however, that consistently outperformed all others during that time. Small-cap stocks held up during the sell-offs, and sizzled during the rallies.

Problem is, the experts would have had you vastly underrepresented in the stuff that worked. Holding only 10 percent in small-cap stocks would not have been enough to offset the losses suffered everywhere else. Market-timing techniques would have told you to load up on the stuff when the time was right.

The most recent bear market pummeled stock portfolios, especially technology stocks. I continue to be impressed by the fact that while the average stock lost more than half its value, the average American barely felt a blip in his standard of living.

The reason: The bond market rallied hard during those years. Falling interest rates led to rising real estate prices, which many people used to maintain their spending habits.

But by early 2000, the market experts convinced everyone to cut back so much on bond exposure that a rally in the bond market didn’t add much to the bottom line. Even the largest pension funds shifted down to minimal bond exposure.

Some asset class somewhere is going to move up during the next bear market. Maybe it will be gold. Or maybe oil will play the star. But is your adviser making sure you have enough of what is going to work, and very little of what will get killed?