Market Pulse: Find your balance
Investors need a good and appropriate sense of balance. There are stocks for growth and vehicles for income. How much of the former should you have? How much of the latter? Not so fast.
Investing is not a one-size-fits-all affair. The “right” exposure to growth (read stocks) depends on your age, risk temperament, family situation, employment and more. The right exposure to income vehicles depends on those and your income needs. To some extent it also depends on yields on income vehicles.
In another column, I’ll cover the choices for income and how one could (and should) spread the risk. For now, let’s talk about stocks and balance.
A balanced portfolio should give an investor exposure to long-term growth areas, provided their investment time frame is more than a few years. Younger people should mainly focus on those areas. Technology and health care are two growth areas with demographics and trends decidedly bullish. They’ve been good places to be. XLV is the health care SPDR, an ETF that invests in scores of companies. QQQ is an ETF holding the 100 largest technology stocks.
Cyclical areas are not necessarily long-term investments, though one could hold stocks for years. Energy companies, industrials, financials, housing and retail are among the best-known cyclical areas. When they move (generally ahead of an economic upturn), they can move fast. Look at the recent moves in bank stocks, which took off as prospects for a rate increase rose (and then fell just as fast after weak economic reports).
Some sectors are in neither camp. Utilities are a good example. They are not long-term growth vehicles, though I’ve recommended some for years and we’ve done well holding them. Black Hills is a good example. Utilities are non-cyclical with their regulated electric and gas operations being predictable almost unrelated to the economy. What they offer more than other sectors is income.
Another way to look at the different types of stocks is to separate them as “growth” or “value” plays. In the latter would be resource and asset- and dividend-rich companies in energy, mining, lumber, etc. Service companies have little in the way of assets. Most technology stocks have little. They are in the growth camp. I’ve seen over the years that one side or the other is in vogue for long periods, often more than a year or two. Then investors gradually switch to the other.
You can see that designing the stock portfolio that works best for you and is most appropriate is not a simple matter. There are many possibilities and variables. Fortunately, there are ETFs to fill any need. Usually several. It would be nice to end this column with a portfolio that is ideal for my many readers and every single client. Nice, but impossible today. And impossible forever.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.