By Brittany N. Cox,
Registered Investment Advisor at Nestlerode & Loy Investment Advisors
Here in Central PA we have four distinct seasons; spring, summer, fall and winter. Each season has different weather (theoretically), different activities and sports happening, and different holidays. However, some of these seasons, activities, sports, and holidays tend to overlap. This past week we have had fall weather creeping in but some summer weather still hanging on. Currently in sports, football season is getting started with NFL, college, and high school ball kicking off, baseball’s finishing up, volleyball’s setting off, and NASCAR’s racing through its season.
If you are the owner of a store selling sports equipment and fan wear, you will have to have 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 must 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 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. Comparable to selling winter sports equipment and spring and summer equipment. While the small caps or swim caps may sit dormant for a period, 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 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 various investors, in this case you, 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, which allows for greater diversification with a smaller investment than buying the individual stocks in your portfolio.
So, while the seasons of investing may change 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 always consult with your financial advisor on what is best for your individual situation.