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.
A trending way to structure a client’s portfolio is thematic investing. Can you give us an overview of thematic investing and what it’s all about?
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.
What is the difference between impact investing and thematic investing?
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.
What advice do you have for someone who is interested in thematic investing?
First, talk to your financial advisor and tell them what you are interested in incorporating into your portfolio.
Are there 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.
Is it safe to invest in thematic funds?
Investors need to keep in mind that an exciting idea is not always a good investment. Thematic investing does not consider diversification, which can leave a portfolio overexposed to any one theme.
As we approach the end of another calendar year, do you have any tax or investment planning tips?
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.
What advice do you have for someone who is considering repositioning their financial portfolio based on the upcoming 2024 election cycle?
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.
