Sector allocation is a key component of good investment strategy. But how many should an investor keep? And which? If you follow Mike’s simple process you will quickly build your sector allocation and identify the ideal number of stocks to hold in each.
Master this concept now!
You will learn
- How many stocks should an investor have in their portfolio and why?
- Which industries you should choose based on your risk tolerance.
- Why not invest much more than 20% in a single sector?.
- How many stocks and how many per sector.
- What is sector rotation and should you use it?
Core, Growth or Income Sectors?
If you’ve ever read an Investing 101 book, everyone will tell you that your asset allocation is the primary determinant of your investment returns. The key is to hold some of the best companies in every industry. Here’s my take on how each sector can help you build a hassle-free retirement portfolio.
Core sectors include companies that you should consider first. This doesn’t mean they all need to be in your portfolio, but they are less likely to be hit by a global recession. Everyone has their own unique characteristics.
Technology: Dividend producers in this sector are typically “old technologies” that dominate their industry. They have significant cash flows and cash flows and are often ignored by retirees due to their low dividend yields.
Financial services: Banks are at the center of our capitalist system. They can get too greedy (2008 anyone?), But in general they make a good source of dividends. Canadian banks are by far my favorites. You’ll also find great companies among the major asset managers (BLK) and payment processors Visa (V) and Mastercard (MA). I am less interested in life insurance companies as they have to deal with this low interest rate environment that we are in right now that makes portfolio management difficult.
Consumer defense: Classic and boring companies fly under the radar during the economic boom, but suddenly become market favorites during recessions. We all need to eat, brush our teeth, and clean our home.
Health care: Healthcare companies have one thing in common. No matter how the recession hits, our health remains crucial. Therefore, recessions should be less harsh on them.
While you can find growing companies in all sectors, some industries offer you stronger growth potential. Many investors would consider the tech sector in this category, but I prefer to classify it as a core asset.
Consumer cyclicals: The name says it all; When the economy is booming, cyclical consumer goods follow. This is a rare sector where you can hit over 20% and still have wide diversification. The process of buying a new car is not the same as buying a burger or a t-shirt.
Industry: The second sector in the growth category is industry. Like consumer discretionary, the industrial sector has a multitude of sub-sectors that are unrelated. Because each industry follows a different cycle, often times you have the opportunity to select stocks at a cheap price while multiple clouds gather together.
Ah! The section you’ve all been waiting for … every retirees dream: live on your dividends without touching your capital! This has become a difficult strategy as many high yielding stocks get knocked down during recessions. Fortunately, there are some sectors that offer decent returns and some level of security.
REITs: The tax structure behind REITs is designed so that the company distributes most of its profits to shareholders (unitholders). For many, real estate is the definition of stability in the investment world.
Utilities: Another haven for investors in times of crisis are utilities. People need electricity and water. Utilities in general should benefit from our current low interest rate environment. Don’t expect much growth as the economy slows, but dividends should stay safe.
Telecommunication & Communication: In communications services, it will be difficult to find low-debt companies that are generating consistently growing dividends. Go for those with a solid business model and strong cash flow.
Ignore these sectors
I’ll get straight to the point: I don’t like the energy and materials sectors. The reason is very simple: both sectors depend on commodity prices to be profitable. Because they have no control over these prices, their cash flow is often volatile. This situation makes them marginal dividend producers. I understand that you can make great investments in these sectors on occasion, but most people get burned more than they get rich.
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