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Was your portfolio ready for COVID-19?

Was your portfolio ready for COVID-19?

| March 24, 2020
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The market has been turbulent lately... extremely turbulent.  Enough to make a low risk investor cringe.  But don't fret, I am going to show you how you can use sector analysis to try and contain some of that turbulence.

Sector analysis can be very important for an active or passive investor.  When we break the market apart into sectors it is easier to see where strength and weakness is.  The sectors we will be looking at are broken down into 3 segments by Morningstar. The three different "Super Sectors" are Defensive, Cyclical, and Sensitive.  A defensive passive investor may find refuge in some of the defensive names while an aggressive active investor may try to limit his exposure to only the best performing sectors.  Here is how the Super Sectors break down.

Morningstar Super Sector Breakdown:

Defensive:

  • Consumer Staples
  • Healthcare
  • Utilities

Cyclical:

  • Materials
  • Real Estate
  • Financials
  • Consumer Discretionary
  • Industrial

Sensitive

  • Technology
  • Energy
  • Communication

Let's start by taking a look at how each of these Super Sectors and their components compared to the S&P 500 Index from the market peak on Wednesday, Feb 19, through to Friday, March 20.

Charts were created by me using ThinkScript in ThinkorSwim by TD Ameritrade

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Defensive Sectors

Here we can see that the defensive sectors have held up well.  They range from -22% to -35% while the broad market S&P500 Index is down -36%. 

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Cyclical Sectors

 This chart shows that the cyclical sectors have been hit worse than the defensive ones. Ranging from -38% to -46%.  

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Sensitive Sectors

The sensitive sectors have more complex dependence on market cycle and will each have their own unique risk profiles.  We can see a very wide range of -33% to -69%. Investing into these sectors would require specific attention to their individual risks.

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The next time you look to add a stock to your portfolio you may want to first consider what sector it is in and how much concentrated exposure you have in that sector.  You also could consider using sector ETFs found here.  I believe an active or passive investor can use sectors to try and limit their market cycle risk.  This could potentially keep that nest egg safer than having a more broad exposure.  I hope this was helpful for anyone thinking about how they can better manage their risk going forward in this turbulent time. 

As always, these are complex issues and every investor has individual requirements for the performance of their portfolio. Please consult your financial adviser before applying this knowledge to your own portfolio.  Concentrating your exposure to certain sectors does decrease your diversity and could lead to negative impacts on your portfolio.

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