Many investors own one or more mutual funds or ETFs but don’t fully understand what those underlying holdings consist of. It’s common to wonder why your portfolio underperforms major indexes like the S&P 500 or the Dow Jones Industrial Average in a given year. But just like your portfolio, it’s essential to understand the composition of the benchmark you’re comparing it to.
Take the S&P 500, for example. While it's widely discussed, it's not a perfect representation of the overall market. This index consists of the 500 largest companies in the U.S., but because it’s market-cap weighted, the top 10 companies account for over 36% of its value. The Dow Jones Industrial Average is even less representative, comprising only 30 stocks.
Early in my career, I learned that even if you own solid companies or funds, being in the wrong sectors or investment styles at the wrong time can significantly impact your performance. That said, market-matching returns may not always be your primary goal—especially depending on your financial stage or risk tolerance. You might be more focused on downside protection than chasing returns.
While identifying companies with strong fundamentals is crucial at the individual stock level, sector positioning is just as important—if not more. For much of the past decade, large-cap growth stocks have outperformed. But that hasn’t always been the case. Historically, we’ve seen cycles where value, international, or small-cap stocks lead the way. That’s why maintaining a well-diversified portfolio across various sectors is so critical.
My personal approach as a portfolio manager starts by referencing the sector weights of the index and then strategically overweighting or underweighting specific sectors. While surprises are inevitable, certain sectors tend to outperform during different phases of the business cycle. I also rely heavily on technical indicators to assess whether a sector or individual stock is likely to show relative strength or weakness.
If you’d like assistance evaluating your portfolio’s asset allocation or sector exposure, we’re always here to help.
— HPK Provident Advisors
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth may not develop as predicted