Time to Revisit Sector Selection

We are at the halfway point for 2022. This year it is anyone’s guess which way the economy is going to go.

Although the markets are largely negative now it doesn’t mean they will remain negative for the rest of the year.

This is a perfect time to review how our portfolios are doing, painful as it may be. It is also a good time to review how well protected our investments are. One of the easiest ways to add protection to your portfolio is to see how well diversified your investments are across the different sectors of the economy.

Spoiler Alert. I am going to use a chart or two in this investment article. 

One of the main things I have learned about investing is that having a structure in place and a few simple rules will bring down your heartrate when stock prices are falling.

Instead of hand wringing and asking, “What Do I Do?”, there are things you can do now and at any time  to control the “downside” of investing. 

Having a structure in place means that you are going to build your portfolio by design.

The structure or design, if followed correctly, will not collapse when it looks like stocks are in freefall.

Building your structure starts with a simple concept: Buy stocks across every sector of the market. Make sure you do not own too much or too little of any one sector. 

The reason is obvious today. The price performance of stocks in each sector do not move in tandem. Different sectors represent different parts of the economy. At any point in time there are stocks and sectors that will perform better, or worse than the general market.

The chart below is from the Fidelity website. What is great about the site is that you do not need to be a Fidelity client to access this information. I use it more than my own brokerage account to get a quick snapshot of the performance of different sectors.

Sectors & Industries – Performance – Fidelity

The first column shows the percentage change for the day. You can see that there are seven sectors that were positive for the day and 4 sectors that were negative.

In the middle of the chart is the Year-To-Date column. So far in 2022 every sector except the energy sector is negative.

Utilities and Consumer Staples are down the least. Consumer Discretionary and Communication Services are down the most.

Now look at the 3-year performance column. Every sector has had positive returns over the last 3 years. Pre COVID shutdown.

Information Technology was up 61.38% and Real Estate was up 7.39%. Quite a difference.

This year Information Technology has been one of the biggest losers down 27.03%.

If I have a large percentage of my investable assets in Information Technology and very little allocated to other sectors my performance is going to be either exhilarating (look at me, the investing genius) or devastating (omg how much have I lost?).

If I take a balanced approach, allocating the same amount of dollars to each sector I will give up some of those big returns, but my losses will be mitigated by the fact that all sectors do not perform the same in every stage of the economy.

I don’t want to guess which sectors will do better or worse in the future.

I mean,  I can guess if I want to, but I feel much more comfortable knowing that I have balanced exposure across all sectors.

During this time when stock prices are off the highs, it is a good time to review what you own and what your allocation to each sector is.

If you have some gaps look to buy stocks in the sectors where you are least invested.

I have written 2 articles that will give you more insight into tackling your sector selection.

Above all, make it easy on yourself. I use a very simple spreadsheet. Across the top I list each sector. When  I buy a stock or a bond I record the purchase in the appropriate sector. 

This has been a useful exercise as I can easily check the sectors where I need to increase exposure.

The Schwab site has a function that will let you search for stocks and bonds by sector and subsector. 

There are mutual funds and exchange traded funds that focus on sectors as well.

Diversification – The Modest Economist®

How Do I Choose a Sector of the Market to Invest In? – The Modest Economist®

This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.