By Brittany N. Cox, Registered Investment Advisor at Nestlerode & Loy Investment Advisors
Here in Central Pennsylvania we have four distinct seasons: spring, summer, fall, and winter. Each season has its different weather (theoretically), different activities and sports and different holidays. However, some of these seasons, activities, sports and holidays tend to overlap. This past week we have had summer weather and some typical spring wet weather. Currently in sports we have basketball and hockey seasons ending, baseball season in full swing, NASCAR racing through their season and football gearing up with the NFL draft in the rearview.
If you are the owner of a store selling sports equipment and fan wear, you must carry items for multiple sports at the same time. Some of the sports items will create more revenue at certain times of the year while others will become dormant for part of the year. However, you have to keep them all on hand the entire year. For example, if ski sales are up by a large margin in the winter and the warm spring weather is delayed longer than usual this year, you don’t want to put away all of the skis in January when people are still skiing in March. On the other hand, if spring happens to be unseasonably warm, you will need to have camping and kayaking equipment on hand and the ski sales will fall off more quickly. So, instead of constantly changing out the inventory, it would make sense to have items in stock for quickly changing and unpredictable weather patterns.
Your investment portfolio should be prepared for all seasons as well. Different sectors of the market perform better than others at different times. Even though they cannot be differentiated by season, it still makes sense to have them coexist in your portfolio to capitalize on opportunities when they arise. This is described in financial terms as diversification. Diversification is a risk management technique that mixes a variety of investments in one portfolio. The idea behind diversification is that a portfolio holding different types of investments will pose a lower risk than an individual investment deciding the fate of the entire portfolio.
You should make sure your portfolio has exposure to a variety of sectors including domestic, foreign, international, small cap, mid cap and large cap stocks, and bonds. While all of these most likely will not take off at the same time giving you large gains, some will do better than others at different times. Compare this to selling winter sports equipment and spring and summer equipment. While the small caps — or swim caps — may sit dormant for a period of time, their time will likely come. You shouldn’t jump out of a position or remove a category of items from your store only because they aren’t doing well for you at this particular time. Instead, focus on the long term.
Some investors find it hard to diversify their assets when they are just starting to accumulate funds in their account or have a small balance. This is a time where mutual funds are helpful. Mutual funds are made up a pool of funds collected from numerous investors for the purpose of investing in securities such as stocks and bonds. The managers of each fund have specified objectives for the fund which describe its role in your portfolio. For example, if your portfolio is lacking international stock exposure, you could buy an international stock mutual fund that focuses on buying international stocks. The fund may hold 100 different stocks resulting in your exposure to all of them with the purchase of the mutual fund. Mutual funds allow for greater diversification with a smaller investment than buying the individual stocks in your portfolio.
So, while the seasons of investing may shift as some sectors outperform others and the market is always changing, focus on the long term. Keep a diversified inventory in your portfolio to take advantage of unexpected weather patterns and changing of seasons. Of course, you should consult with your financial advisor on what is best for your individual situation.
***Nothing contained in this article should be interpreted as a promise or guarantee of earnings or investment results nor a recommendation for the purchase or sale of any security or sector.
