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What Sectors You Should Invest in Next Year
It is no secret that many different sectors of the market have performed poorly this year.
With all that in mind you are probably wondering what sectors might offer better upside in 2023.
What Type if Investor Are You?
The first thing you need to decide is how you plan to diversify your portfolio.
You might think of diversification as picking funds that expose you to many different stocks. That is correct on the surface level but there is more behind it than just that.
Most people diversify by picking a blend of US stocks, international stocks, and bonds. They do this through ETFs, mutual/index funds, or picking individual stocks themselves.
While this is a solid approach which will help decrease risk and provide good returns in the long run it is not the only way to diversify your investments.
Some people also choose to diversify by sector. They may weight portions of their portfolio across different types of companies domestically and abroad.
For instance, they might be bullish on energy and utility stocks and might invest in Exxon Mobile here in the US and Saudi Aramco abroad.
They will certainly allocate a portion of their portfolio to all of the different sectors (see 11 stock market sectors here!) but will overweight the ones that they feel have the most upside.
Neither approach is wrong, and both provide diversification. But below is my approach for clients in 2023.
2023 Outlook
The US economy has already entered or will enter a recession next year. We are also in a high inflation, rising interest rate environment.
The Federal Reserve should taper back on the rate they are tightening the economy, and I would not be surprised if we see them pivot to decreasing rates by Q4 2023.
Stocks are much cheaper than they have been in previous years due to the market pullback in 2022. We have a prime opportunity to rebalance our portfolios and modify our long-term plan.
In times of rising rates, the financial sector typically performs better than other sectors. Most of the companies in this sector are banks, private equity firms, and other investment firms.
These firms are able to generate more money because the spread they are earning on their lending portfolios is larger than it has been in years.
They are not without risk though. With increased rates comes an increased chance of default by borrowers.
Technology companies and startups are two areas that typically perform poorly in this time of environment.
Many companies who fit those parameters have borrowed money to fuel their growth. Some, especially in the startup space, have not even made a profit yet.
High rates on large debt loads cut into profit margins and can ruin a company in a very short amount of time. This is a risk in this area.
The other factor that we have to consider is the likelihood of a recession.
I personally believe we are already in one or will enter one very shortly. Luckily, we have plenty of data that shows what tends to perform well in a recession.
But first I want you to think of how you would invest in a recession.
Would you look for the next high-flying startup that is turning no profit? Or would you look for a company/sector that would continue business as usual while everything else is negatively impacted?
I think most would choose the ladder.
That’s why it should be no surprise that consumer staples and healthcare tend to do well.
Consumer staples are companies like grocery stores, household product manufacturers, and beverage makers (alcoholic and non-alcoholic).
Healthcare is pretty self explanatory. Insurance firms, care providers, hospital equipment manufacturers, and pharmaceuticals are examples.
It makes sense that these companies tend to do better.
You are less likely to cut them out of your budget than other items. Those other items tend to be electronics, vehicles, and lavish vacations that are harder to afford.
So now that we have an idea of what might perform well, how should you think about investing your own money?
Investing in 2023
When it comes to investing in 2023 you need to first decide if you have a bullish or bearish outlook. Once you determine that you can decide how to proceed.
My approach is the diversify across the market and strategically choose sectors to overweight in a client’s portfolio.
So, for clients who are more bullish I would allocate more of their portfolio to stocks, especially small cap and international where I think a bigger rebound might happen.
I would then pair it with the financial sector which I am a little more bullish on in 2023. I would also invest more in areas of the market that were hit hard in 2022. Technology and Services.
For my investors who are a bit more conservative I would follow a similar diversification approach but supplement with sectors that perform better during a recession.
Consumer Staples and Healthcare.
The Final Word
This is why it is important to determine how you feel about the market next year.
This will allow you to properly diversify your portfolio and be tactical with a portion to align with your outlook.
This is also why I, as an advisor, treat every client differently based on their risk tolerance.
There is no one size fits all approach to investing for clients and any advisor who uses one should be fired immediately. Understanding a client’s outlook and risk tolerance will allow me to manage their assets more effectively.
What is your market outlook for 2023?