"In recent months, I've had conversations with colleagues, clients, and neighbors that go something like this: "Oil stocks are doing great, and it looks as if prices will continue to rise. Energy supplies are shrinking, and the fast-growing Chinese and Indian economies are using more and more energy."
The thesis sounds reasonable. It's certainly consistent with the scraps of evidence that we find in our daily lives—rising prices at the pump, stores stocked with goods from China. It's at this point that the conversations take a worrisome turn: "That's why I'm loading up on energy stocks."
Whenever an investment produces exceptional performance, a pattern emerges. Investors and the media construct an after-the-fact explanation for the stunning result. This explanation then becomes a justification for future investment in that same sector.
In this Chairman's Corner, I'll review a few booms from the past 25 years. In each case, a continued rally seemed inevitable. Until it didn't. These episodes reinforce a keystone of Vanguard's investment philosophy: diversification. Broad diversification across securities, sectors, and asset classes is your best response to the financial market's one constant: uncertainty.
Energy stocks and $150 a barrel oil
When I started paying attention to the stock market in the late 1970s, the investment of the moment was, oddly enough, energy stocks. During the three years ended December 1980, natural resources—mainly energy—stocks returned an annualized 31.3%, outpacing the broad U.S. stock market by more than 21 percentage points per year. In 1980, energy stocks accounted for about 26% of the U.S. stock market's value, compared with just 10% today."