Opinion: Peeling back the layers of an investment portfolio

George Timson

Ever sliced into an onion and found yourself crying? We don’t want your investment portfolio to evoke the same emotional response. Let’s embark on a journey of discovery through the layers of your investments, minus the tears.

Starting at the top, the first layer of your portfolio is the overall asset allocation. This is your breakdown between stocks, bonds, cash, and alternatives (i.e. private investments and cryptocurrency). Each of these has its own set of layers as well.

Stocks can be in companies that are foreign or domestic, big or small, dividend-paying or growth oriented, and fall into a range of 11 different economic sectors.

Bonds are categorized based on credit quality, interest rate sensitivity and whether they were issued by a corporation or government entity.

Alternative assets have a multitude of layers of their own.

Cash, thankfully, is straightforward.

There are many moving parts, and it’s important to eat the proverbial onion one bite at a time. In this bite, let’s peel back a layer to take a closer look at the different economic sectors.

Most economists break the stock market down into 11 sectors. These range from technology companies to industrial manufacturers, and everything in between. Each sector has its own rhythm, like dancers in a chaotic ballroom. Some years, one sector waltzes to the top while others trip over their own feet.  Owning stocks in each of these sectors, and having a disciplined approach to managing them, is essential.

When we think back to some of the more profound economic events in recent history, there was usually one specific sector of the market that started the trouble.

A couple great examples are the dot com bubble and the Great Recession. 

These events were so extreme, they dragged the economy down across the board. As always though, some sectors did better than others. During both instances, consumer staples companies fared much better than their counterparts. People still had to buy groceries. Utility companies also can do well in times of trouble.

Investors who were concentrated in technology or financial companies during these times were truly hurting. Investors who were well-diversified could shift money out of places that were holding up better and buy shares of these once high-flying tech and financial institutions at a great price.

A good reminder not to keep all your eggs (or onions!) in one basket.

Current times are no different. In 2023, technology companies had a banner year, while the utilities sector performed poorly. Capital rushed in to buy tech stocks at a “discount” after they struggled the previous year, and many investors were leaving the utilities sector – typically known for high dividends and income – to place their money in products such as certificates of deposit where they could achieve their income goals with less risk.

There will always be money flowing in and out of different areas of the economy for more reasons than we can count. The good news is you don’t have to count the reasons – and many of them don’t end up mattering much in the long run.

In our current age of readily available information, the stock market is still impossible to consistently predict, but it has become quite simple to monitor and react to. Seeing which sectors are doing well is as easy as checking the weather. You can trim from the winners and add to areas that are under pressure with the push of a button – sell high and buy low.

Understanding the layers of your investment portfolio is essential for achieving your financial goals. By diversifying at all levels and staying informed about market trends, you can navigate the complexities of investing with confidence.

George Timson is a wealth management adviser at SignalPoint Asset Management in Springfield. He can be reached at gtimson@signalpointinvest.com.