Suggested Portfolio Allocation for Early 2009

Overweight the Top Sectors, and Underweight the Weak Sectors

Dec 30, 2008

One key to successful investing is picking the right sectors and avoiding the wrong ones. This suggested allocation for 2009 may help investors build an ideal portfolio.

Most investors will be more than happy to close the books on 2008. It was a disastrous year, and no sector or allocation yielded particularly strong results. Nevertheless, it’s not too soon to start considering how to best take advantage of what could be a promising recovery in 2009.

In that light, investors may want to consider overweighting certain sectors with more bullish potential. Likewise, they may want to underweight sectors that appear to be at a technical or fundamental disadvantage.

The following allocation suggestions may be a helpful starting point in creating such an optimal portfolio.

Sectors to Overweight

Financials – Financial stocks took the hardest hit in 2008, but are also getting the most relief from Federal programs. Besides, the stocks of many good companies were lumped into the ‘discard’ group when panic overrode logic.
Healthcare – Healthcare stocks fared about as well – or poorly – as any other group in 2008. However, they’ve emerged as relative leaders in the latter potion of the year. This strength could carry forward into 2009, particularly under a Democratic White House.
Consumer Staples – While 2009 could be a recovery year for stocks, safety and certainty will still be in demand. Recession-resistant sectors are poised to outperform, thanks to their predictability.

Sectors to Underweight

Basic Materials – Much of the rally in commodities during 2008 was based on rampant inflation. Now that inflation has been tamed, and given that demand for any materials is weakened thanks to the economic contraction, basic materials aren’t particularly attractive.
Industrials – With or without an implosion of the automobile market, manufacturers are retreating rather than advancing.
Technology – Like materials and industrial stocks, expenditures on new or better technology will likely be a luxury no company is willing to pay for until the economic footing is more certain.

Sectors to Neutral-Weight

Energy – As overbought as oil was in mid-2008, it went into an oversold state in late 2008. It should find equilibrium in 2009, yielding no specific advantage or disadvantage.
Utilities – For investors in search of dividends, utilities remain attractive. However, the sector isn’t likely to participate in any marketwide recovery.
Telecom – It’s worth noting that certain segments and individual stocks in the telecom sector may well outperform the sector. The sector itself, however, remains mired in mediocrity.
Cyclicals – For the same reason corporations aren’t overly-interested in major capital expenditures (a shaky economy) individual consumers are also apt to spend less on goods or services that aren’t absolutely essential.

Applying a Sector Allocation Strategy

Bear in mind these suggestions are merely a starting point; investors should always discuss any such strategy with a qualified professional who is familiar with their particular situation.

On the other hand, those same investors should also be aware that a completely sector-neutral portfolio is likely to only yield market returns. Focusing on the best arenas, and avoiding the weakest ones, is a riskier yet very likely way to exceed the market’s average return.

For those investors who like the idea of a weighted-sector allocation strategy, but don’t want to choose individual stocks, may choose to use exchange-traded funds to employ this suggested allocation model.