A lot of us were hoping for greener pastures in the first few days of 2022, but for many, portfolios are still seeing a sea of red. With the Federal Reserve’s latest ‘minutes’ release sparking a further sell-off in growth stocks because of proposed increases to interest rates, is it time to buy into financials?
Why should you invest in financial stocks?
Financial services companies tend to hold on to a lot of cash as part of their business models. We all have savings accounts, investment accounts, and insurance policies for example, that we pay into every year.
Banks make a return on cash by lending it out to businesses and consumers, and insurance companies will often invest in stable assets to earn a return on top of the premiums they take on. So, as cash-heavy businesses, when interest rates increase, so does the company’s opportunity to make more money.
Similarly enough to financials, traditional consumer staples tend to perform well. Why? Simply because it’s an essential industry. We’ll require our grocery products whether interest rates increase or not.
Others that tend to benefit include anything tied to the “value stocks” bunch — companies with low debt, lots of cash, as well as reliable and steady streams of revenue.
So what makes a good financial stock?
This is where it begins to get difficult. Banking is one of the industries that is outside most people’s circle of competence. It’s one of those sectors that you’ll most likely be staring puzzled at a bank’s latest earnings report and assets columns. It’s difficult to know what to take from it unless you have hands-on experience in banking or a strong accounting background. Even at that rate, you still might be lost for words! That doesn’t mean it’s uninvestable, however.
The one financial stock for your portfolio: Berkshire Hathaway
Berkshire Hathaway (NYSE: BRK.B) is an excellent option for investors to get exposure to a broad portfolio of assets, but particularly to the financial sector. You’re handing the reins over to Warren Buffett and Charlie Munger, the pair noted as the greatest investors of their generation, have navigated any boom and bust cycle you can imagine, and that have a historic return of 3,300,000% since Berkshire’s inception in 1965.
Retail, commercial, and investment banking are a big part of this holding companies portfolio, along with plenty of insurers, brokers, credit intermediaries, and consumer staples companies in there too. Bank of America, Wells Fargo, BNY Mellon, Aon, American Express, Visa, and Marsh & McLennan are just a couple of big names in the financial space — and don’t worry — there’s plenty of exposure to Big Tech through Apple, and even disruptive industries like electric vehicles (EVs) with BYD.
To be clear, I don’t think it’s the end of days for growth stocks. In fact, there are many that look like great investments since valuations have taken a haircut. Even if interest rates are to rise, it would only be a disastrous issue for companies suffering from rampant speculation or have been managed irresponsibly by taking on too much debt. In the long run, some growth names look extremely promising, but for the foreseeable future, getting exposure to financials like Berkshire offers might be a better bet.
Financial Writer at MyWallSt
David's favorite stock is Google. He's a daily user of its YouTube platform, where you can learn or find something brand new at the touch of a button. He believes the company will continue to grow for many years to come.