Sector Investing — Focusing diversification into the sectors
What constitutes a sector?
A sector is a particular industry or subset of the economy. Examples include utilities, manufacturers, and companies in the financial and healthcare industries. Some sectors are broad enough to warrant further division into subsectors. For instance, the healthcare sector includes hospitals, long-term care facilities, and medical groups, among others. A few subsectors are so large and dynamic that many investment professionals slot them into their own sector. One example is pharmaceuticals, which could be viewed as a subset of healthcare but which is often considered its own sector.
Diversifying among sectors may help reduce portfolio risk.
What goes up might come down
Just like every other investment category, the investment performance of sectors varies relative to other sectors and to the market as a whole. Sometimes, negative news in one sector might create an opportunity in another. A steel manufacturer might have problems delivering goods if the price of diesel fuel rises, but the same fuel price hike could increase profits for the oil industry.
Widen your focus to manage risk
You’ll find that industries go through cycles depending on countless factors happening within the global economy. This can cause sectors to fall in and out of favor with investors and affect the short-term performance of companies in a particular industry. While focusing your investment strategy on specific sectors may offer the potential for growth, diversifying across many sectors can help to minimize the risk of any one sector performing poorly. Diversifying among several sectors may help to stabilize your long-term returns.
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Diversification and asset allocation do not protect against losses or guarantee investment growth.
Sector investments may offer greater potential for growth, but there are additional market and business risks associated with them, such as a greater degree of change in earnings and greater short-term volatility due to their concentration in a focused area.