Investors hear a lot about portfolio diversification, and there are a number of ways to diversify. When it comes to stocks, one way to help ensure adequate diversification is to include stocks from several different market sectors in your portfolio.
An economic sector is made up of industries that have certain characteristics in common. The industries in a given sector tend to react similarly to trends in the overall economy. Good or bad news affecting a major stock in one industry may trickle through to stocks in other industries in the same sector. Thus, by including stocks from more than one sector in your portfolio, you may be able to lessen the effect on your investments from potential losses in any one segment. Here are some of the key stock market sectors and types of industries within each sector.
- Consumer discretionary: autos/auto components, household durables, leisure equipment/products, restaurants, textiles/apparel, hotels, media, and retailing.
- Consumer staples: food/drug retailing, beverages, food products, tobacco, and household/personal products.
- Energy: energy equipment/services, oil, and gas.
- Financials: diversified financials, insurance, and real estate.
- Health care: Health care equipment/supplies, health care providers/services, biotechnology, and pharmaceuticals.
- Industrials: aerospace/defense, construction/engineering, electrical equipment, conglomerates, machinery, airlines/air freight, railroads, and transportation infrastructure.
- Information technology: software, Internet, technology consulting/services, communications equipment, computers/peripherals, electronic equipment/instruments, office electronics, and semiconductor equipment/products.
- Materials: chemicals, construction materials, containers/packaging, metals/mining, and paper/forest products.
- Telecommunication services: diversified wireless telecommunication services.
- Utilities: electric, gas, and water utilities.
In seeking to diversify the equity portion of your portfolio, you may wish to consider reducing stocks from sectors in which you are overweighted and adding stocks in areas where you lack exposure. Of course, certain sectors can be featured more prominently in your portfolio, based on current market trends, economic conditions, and your own financial goals.
Ask your financial advisor how trends in the stock market and the economy may affect your investments and how you can best take advantage of those trends. Be sure to keep your own financial objectives at the forefront of your decision-making. Although representation from each sector may enhance diversification, other concerns, such as the need for income or a short-term investment time horizon, may dictate a different sector structure for your own portfolio. IBI