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.
Basic materials
Aluminum, building materials, chemicals, containers, gold mining, metals, paper and forest products, steel.
Capital goods
Aerospace/defense, electrical equipment, engineering and construction, machinery, pollution control.
Consumer cyclicals - durable goods
Automobiles, auto parts, hardware and tools, manufactured housing, furniture and appliances (Cyclical stocks tend to rise quickly before the economy turns up and fall quickly before the economy turns down).
Consumer cyclicals - nondurable goods
Broadcast media, entertainment, hotels/motels, leisure time companies, photography/imaging, publishing, restaurants, retail stores, specialty printing, toys.
Consumer noncyclicals
Beverages, foods, cosmetics, household products, housewares, shoes, textiles/apparel, tobacco.
Energy
Integrated oils, oil and gas drilling, oil exploration and production.
Financial
Banks, insurance companies, investment banking, real estate investment trusts.
Health Care
Drugs, HMOs, hospital management, medical products and services.
Technology
Communications equipment, computer systems and software, electronics and semiconductors.
Transportation
Airlines, railroads, trucking companies.
Utilities
Electric companies, natural gas distribution pipelines, telecommunications.
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.
