This article describes methods of constructing an all-weather portfolio. Before getting into the nitty-gritty of constructing an all-weather portfolio, it helps to know how equity mutual funds are classified and how their performance is impacted by market conditions.
Classification by Market Capitalization & Style
Equity funds are commonly classified based on market capitalization of the companies in or https://npfinancials.com.au/which they invest their assets and investment style.Market capitalization is divided into three categories: large, medium, and small. Investment style likewise is divided into three categories: value, growth, and blend.Combining both types of classifications, equity mutual funds typically fall into one of nine boxes on a 3 x 3 matrix. This classification system works well in analyzing diversified funds.
Classification by Sector & Industry Group
Instead of dividing the equity market by market capitalization and investment characteristics such as value or growth, an alternative way is to slice it by sectors. The Global Industry Classification System jointly developed by Standard & Poor’s and Morgan Stanley Capital International, for example, classifies the equity market into ten sectors, such as financials and information technology. Each sector in turn is divided into several industry groups. This classification system is particularly useful for analyzing sector funds that invest their assets in a given sector like information technology or industry group like computer hardware.
Impact of Business Cycle
The net asset value per share of a fund changes in response to the prices of stocks held in its portfolio. Generally speaking, stock prices are impacted by business conditions. The business cycle has various phases to it: Recovery, Boom, Slowdown, and Recession. Different parts of the stock market as seen from market capitalization, style, or sector perspectives perform differently in different phases of the business cycle.
Impact on Diversified Funds
Growth style funds, in general, fare well during expansion phases such as recovery and boom, and value style funds during contraction phas