Allegheny Financial Group advisor Ian Cerminara, CFP®, recently sat down with Director of Research, Joe Clark, CFA, to discuss trending topics in today’s investment world and some considerations to ponder as we approach a new year.
Thematic investing can be thought of as identifying themes, trends, or beliefs and tailoring an investment portfolio to take advantage of these opportunities. There is no one way to think of thematic investing; it can be as simple as adding a mutual fund or ETF that is geared to invest in artificial intelligence or green energy trends, for example. Or thematic investing can be as complex as building an entire portfolio of multiple themes that have a secular growth story, like the infrastructure improvement initiative or cybersecurity.
We typically build portfolios by selecting an equity and bond allocation that is appropriate for an investor’s needs and allocate globally to a variety of investment managers. When building a thematic portfolio, allocation is based on diversification amongst themes rather than traditional diversification of assets.
Impact investing focuses on making investments that will not only deliver a financial return to your portfolio but also positively impact society. Impact investing could be considered a thematic element of a portfolio; however, like many topics, this will vary depending on who you are asking, but impact investing is a flavor of thematic investing. An example of impact investing would be investing in a bond issued by a smaller entity in an underprivileged area where the investment will have a more meaningful impact than loaning money to a huge corporation or municipality. If investing in stocks, an impact investor would care about the company’s community involvement and how they are striving for social or environmental improvements rather than just the company’s bottom line.
First, talk to your financial advisor and tell them what you are interested in incorporating into your portfolio. Allegheny recommends some mutual funds that employ thematic investing, so it can be as simple as ensuring these funds are included in your portfolio.
Suppose there are specific themes you would like incorporated. In that case, there is a long list of ETFs available that hit just about every thematic topic imaginable. Allegheny can quickly provide options, or investors can log in to their brokerage account or even run a Google search to find a list of investment opportunities to fit their goals.
We recommend starting small; just because an idea sounds exciting does not mean it will turn into a sound investment. Thematic investing does not change Allegheny's view of diversification; we still do not want portfolios to be overexposed to any one theme.
After a volatile 2023, this could be a good time to rebalance portfolios back to their target allocation. Large U.S. companies have outperformed smaller companies this year, which could provide an opportunity to sell some large-cap investments and reinvest those in market areas that have not performed as well, like small-cap. Rebalancing back to target allocations is one way to keep investors disciplined and ensure there is not too much risk in any one area of a portfolio.
Cash allocations could be another area to review. This year has given us a reprieve from cash earning nearly nothing for over a decade; however, we should not let that keep us from maintaining a diversified portfolio. Cash is fine for near-term expenses, but if the Federal Reserve begins to cut interest rates next year, we want to make sure portfolios have these higher interest rates locked in for longer than what cash provides.
The best advice might sound like the most basic: don’t do anything. For clients thinking they must make a change because of messaging in the media, ask yourself, “What is going to change in my personal life if Candidate A wins or loses?” If the answer is nothing, then that is exactly what you should do in your investment portfolio as well. If you are not sure of the answer, consider if you would change vacation plans depending on which candidate wins. Or if something breaks in your house or car, will you get it fixed? If the election outcome will not change your spending habits or how you live your daily life, then there is no reason to make many adjustments to your investments.
No matter what the topic or trend, Allegheny remains steadfast in our process of creating strategic, diversified portfolios focused on a long-term outlook.
Ian Cerminara, CFP® and Joe Clark, CFA | Allegheny Financial Group | December 2023
The information included herein was obtained from sources which we believe reliable. The views in this article are being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.