For the most part, our clients trailed the averages for the year by about 4% despite a late year rally in technology stocks. As this was the second year in a row of underperformance (last year by 1%), we reviewed our strategy from top down to see whether flaws exist. Our philosophy is that 50% of a portfolio’s return is driven by the overall market, 30% by the sector allocation, while only 20% of a portfolio’s return depends on specific companies. In other words, if the stock market is rising in general and we’re invested in the fastest growing sectors, almost any companies in those sectors will do.
The fastest growing sectors in the S&P 500 since 1950 have been technology, healthcare and financial services. Technology does best when the economy is expanding rapidly (businesses upgrade capacity, consumers spend), healthcare does best when the economy is contracting (healthcare spending is independent of the economy) and financial services do best when the economy is coming out of recession (interest rates are still low, but demand for credit is picking up, leading to expanding lending margins.)
Accordingly, we typically invest 25% of our clients’ equity allocations to technology, healthcare, with the balance spread across industrials, consumer discretionary and staples, energy and materials. We have virtually no allocation to utilities or telecommunications stocks.