Another week. Another raise. Sysco (SYY) raised their dividend 5.9%.
A question entered my mind last week. How do professional wealth advisors or asset managers or even hedge funds build a portfolio? How would they build an income portfolio? I don’t want to beat the market, but I want to try to track it or at least keep up with inflation while receiving an income. It led me down a rabbit hole. I was aware of Modern Portfolio Theory, but then I learned about the Black-Litterman Model. From there I learned about a whole host of frameworks, strategies, models, simulations, and approaches. It makes sense to layer these, back test them, and see what works. Unfortunately I’m not a hedge fund and I have neither the time nor the resources to research and test. But my main takeaway was risk management through diversification – something I already attempt to do. This got me thinking.
What asset classes do I have exposure to? According to Wikipedia, these are the main broad asset classes:
Equities (stocks)
Fixed Income (bonds, loans)
Cash (currency, money-market instruments)
Foreign Currencies (FX)
Real Estate (physical property or REITs)
Infrastructure (pipelines, utilities, transport networks)
Private Equity (ownership in unlisted companies)
Commodities (gold, oil, agricultural products)
Cryptocurrency (Bitcoin, Ethereum, etc.)
There are also alternative assets like artwork, royalties, wine, watches, etc. The only alternative asset that pays interest is royalties, but I have limited budget and even more limited access to those types of investments (though some are available). Those are out for now.
I have exposure to equities, fixed income, minimal cash within my portfolio because I usually invest it all, real estate, infrastructure, private equity, and commodities.
So when it comes to assets I need to look into increasing my cash position, invest in some type of foreign currency asset that pays dividends or interest, and invest in a cryptocurrency asset that pays some type of interest. I’m going to have to make some assumptions and historically equities, private equity, and real estate performed the best. I may weight my portfolio more toward those assets. Cryptocurrency (specifically Bitcoin) has done remarkably well, but it’s new and as the saying goes, “Past performance is no guarantee of future results.” But for diversification, if I can find a cryptocurrency that pays interest, maybe it will help mitigate risk as a small addition to the portfolio.
Within equities (though there is some overlap/exposure to different asset classes), there are 11 sectors as categorized by MSCI and Standard & Poor’s. I’m sure there are some gray areas, some exceptions, but broadly speaking this is as good a list as any and is used widely in the financial industry. These sectors are:
- Energy
- Materials
- Industrials
- Consumer Discretionary
- Consumer Staples
- Health Care
- Financials
- Information Technology
- Communication Services
- Utilities
- Real Estate
Looking at the percentages of these sectors in my portfolio, I see I need to increase holdings in Energy, Materials, Industrials, Utilities, Health Care, Consumer Discretionary, Consumer Staples, and Communication Services. Yikes. Maybe I’m not diversified. Of these, Industrials, Health Care, and Consumer Discretionary sectors have performed better historically.
So that’s it. A little more knowledge to further refine my approach to investing. Will it pay off? Maybe.