Asset Class versus Sector Investing
I recently received a note from a client. They had read an article on the decline of the “building supplies” sector here in the United States. They were curious if their portfolio included investments from this category and what my thoughts were.
The investment strategy we use is NOT based on sector. Thus, we don’t really look at or care about “building products”, per se, as a sector, but instead care more about how those companies fit into one of 9 different asset classes that we utilize in our diversification strategy. I haven’t read any research studies that indicate sector performance is “predictable”, nor any that indicate diversification by sector is “better” than the current strategic asset class diversification that we use.
When I reviewed the detailed holdings of our portfolios, as they existed and were reported in Morningstar at 12/31/06, there are “building products” companies in the diversified portfolio. Of those stocks, overall, 24% appear to be invested in the “Manufacturing Economy / Industrial Materials” sector. Even at the “Industrial Materials” level (the 24%), it was further diversified by 75% of the stocks held internationally and 25% in the US. A much smaller % of this 24% amount (Industrial Materials) is held specifically in the “building supplies” category.
The diversified model portfolios (at end of February) held over 14,500 stocks in the US and Internationally, combined. By applying the percentages gathered from Morningstar, this means that approximately 3,480 companies held were in the Manufacturing Economy / Industrial Materials sector. Approximately 870 of these company stocks held were in the United States. An even smaller group are specifically in the “building supplies” sector. So less than 6% of current portfolio of U.S. stocks held in the model portfolios are focused in this sector.
So, what does this mean?
Certainly there is an impact in portfolio performance when specific companies that are involved in “building supplies” or other sectors perform poorly. We expect this.
We believe that no one can consistently pick winning stocks, and we believe that no one can optimize and consistently choose when to invest or divest in a sector. Certainly we can’t, and don’t predict the future.
More than nine times out of ten, the level of diversification in a portfolio will explain that portfolio’s performance. Consequently, diversification is the most prudent approach. Provided a portfolio is broadly and strategically diversified, even if one sector in the U.S. does poorly, the impact on the portfolio will likely be smaller.
My advice? Choose a prudent investment strategy that directly supports your financial plan goals and objectives and stick with it. Don’t be swayed by the financial press.
From financial wisdom, better stewardship.
Wayne's Wisdom
"My vision is to be able to impart meaningful financial wisdom and tax advice that enables people to achieve better stewardship for their families and businesses."
