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Asset Class: Using the S&P 500 sector breakdown as a target

"Asset Class: Using the S&P 500 sector breakdown as a target"

As a retired dividend growth investor, I was in need of a target asset allocation.

 Throughout my working career, I acquired various stocks based on yield or growth but had little portfolio cohesion. I was way overexposed in some sectors and had little or no exposure in others.   When faced with the boom and bust of 2000-2003 and again 2007-2009, I saw considerable volatility in my portfolio as a result.  I decided to try to limit volatility through diversification and chose the S&P 500 sector breakdown as my target.

Although the S&P suffered severe swings during both of the bear markets, it has come back each time.  Some sectors were affected more severely (ie. tech in 2000-2003; real estate and finance 2007-2009) however other sectors (consumer cyclical, consumer staples, and health care), held up and lowered volatility.

 

 

 

S&P 500 Sector Weightings %

Sector

SPY

Basic Materials

2.86

Consumer Cyclical

9.31

Financial Services

14.91

Real Estate

1.59

Consumer Defensive

10.63

Healthcare

10.67

Utilities

3.11

Communication Services

4.15

Energy

12.87

Industrials

12.73

Technology

17.18

Click to enlarge


Since dividend growth stocks can be selected for each sector, it is possible by choosing the best to limit volatility during market crashes.  How well did a market weight portfolio of Mcdonald's (NYSE:MCD), Proctor & Gamble (NYSE:PG), and Johnson & Johnson (NYSE:JNJ) do vs. the S&P 500 (NYSEARCA:SPY) in both crashes?  The portfolio would be made up of 9% MCD, 11% PG, 11% JNJ and the rest would be made up by existing stocks in the portfolio.


 

Chart forSPDR S&amp;P 500 (<a href='http://seekingalpha.com/symbol/SPY' title='SPDR S&P 500 Trust ETF'>SPY</a>)
 


 

If the portfolio is close to the same percentages as the SPY, the other sectors could be represented by S&P sector ETFs. How well did they do? The other sectors are made up of industrials (NYSEARCA:XLI), materials (NYSEARCA:XLB), energy (NYSEARCA:XLE), utilities (NYSEARCA:XLU).


 


Chart forSPDR S&amp;P 500 (<a href='http://seekingalpha.com/symbol/SPY' title='SPDR S&P 500 Trust ETF'>SPY</a>) 


 

As can be seen by the chart, they all did about as well or better than the SPY. Based on these charts I decided to model my portfolio of dividend growth stocks by the SPY percentages by sector. I believe I have done better during the crash of 2007-2009 than I did in the crash of 2000-2003. However, this is a work in progress with the goal of capital preservation, through diversification.


 

Disclosure:  I am long PG and JNJ.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.