Does your investment statement look like a jumbled mess of financial lingo? Are terms like asset allocation, fixed income, and equity confusing? If you feel this way you are certainly not alone. While investing can seem complex, having some baseline knowledge will make it simpler than you think.

Let’s imagine you have a portfolio. It probably has some mix of equity (stocks) and fixed income (bonds). You may know what percent of each asset class you own, why you invest in those percentages, and how they contribute to your goals. If you do…congrats! You are three steps ahead of most investors. If you do not, do not worry, let’s discuss your equity allocation. Let’s talk about what equity is, how it is used in a portfolio, and how to build an equity allocation.

First, why are these investments called equity? This term describes a position of ownership. Holding equity means you own part of a company as represented by the stock you invest in. Thus, if you own shares of Coca-Cola (KO) in your account you own a very small portion of that company. The stock’s value is determined by many inputs including the push and pull of market participants’ reactions to company-specific and economic news.

Why do we invest in equity? Typically, it’s because we want our assets to grow. Over time, as the company earns more money the share price tends to increase reflecting those additional profits. And…also over time, your equity allocation should be one of the higher-returning asset classes in your portfolio. This potential comes at the cost of being riskier than the other part of your portfolio – fixed Income or bonds. Historically, equity volatility (the ups and downs in value) has been much higher than bonds but returns have also been significantly higher. Also, because stocks and bonds have different risk characteristics, investing in both can add diversification. Higher returns and diversification are two important traits of equity investing. But the simple truth is most investors need a higher rate of return to meet their personal financial goals and equity is an important part of that equation.

Knowing what equity is and how it is used in a portfolio isn’t all there is to it. Anyone can invest in equity and many people follow a DIY approach. This can put a strain on two critical things, time and emotions. Things like consistently tracking markets and consuming high levels of information are time intensive while having the ability to execute objectively is also critical. These activities can greatly improve the odds of successful outcomes but may not be part of a DIY model. In other words, investing takes a lot of planning, discipline, and flexibility, and may tend to pull on your emotions.

Now that we know what equities are and how they are used in a portfolio we can address building an equity allocation. There are many different ways to go about this process. At Moore Invested we follow an equity allocation approach that we have refined over the past two decades and has delivered many successful outcomes.

So how does it work?

• First, we allocate to a broad-market index ETF (exchange-traded fund). This adds “market” exposure as the ETF owns several underlying companies. It is also a cost-effective way to get initial diversification.¹
• Next, we use research and analysis to identify what sectors of the economy are positioned to do well which leads us to buy a couple/few sectors like technology or healthcare.
• Third, we follow a similar analysis but at the industry level. We will add specific industries like semiconductors, cybersecurity, or aerospace and defense.
• Last, we will add a collection of individual stocks that are carefully selected based on a host of growth or value characteristics.

Once we build an equity allocation, we follow a buy-and-manage approach – while we would love to hold our investments forever, markets are dynamic, and when we need to trim, add, or exit a position we do so. As an example…when the price of a holding becomes over – or undervalued we will tend to trim or add to a position. If those shifts are extreme, we will likely choose to exit the position and add something else to the portfolio.

We view these situational changes as “tactical” shifts in how we invest your equity allocation.

Hopefully, this brief explanation has answered some questions about equity investing and left you excited to get started. If you want to have a more in-depth discussion, please reach out to us!