“Don’t put all your eggs in one basket” isn’t just a saying, but timeless advice about diversification. You don’t want to pin all your hopes on a single investment when building your portfolio. However, you can’t just pick out a random handful of companies and call it a diversified portfolio. Stocks like Google and Facebook depend on similar tailwinds for growth and tend to move in unison. Owning shares of both companies doesn’t really diversify risk out of your portfolio. If you want to diversify the equity portion of your portfolio, you’ll need to do it across different classes of stocks and across different stock market sectors.
Nasdaq breaks the equity market down into 11 different sectors based on industry within the broader economy. Some sectors like energy and utilities are known to be less volatile than the high-flying tech and finance sectors, but there’s a good chance you own a piece of all 11 if you own index funds. Some investors jump from sector to sector in an attempt to beat the market as economic trends take shape. Sector investing isn’t for everyone, but understanding how the different sectors work is important for everyone. Here are four sectors to keep an eye on.
Technology
The tech sector contains some of the hottest growth stocks on the planet. As technology continues to advance, stocks in this sector tend to outperform their peers, especially in environments like today where interest rates are low and cash is everywhere. Technology stocks usually involve the manufacturing or production of some type of computer hardware or software. Today, that definition includes social media companies like Facebook and Twitter, legacy tech firms like Apple and Microsoft, and companies like NVIDIA who have their hands in tons of technological cookie jars.
The NASDAQ is heavily weighted toward the tech sector and the NASDAQ 100 ETF (QQQ) is a staple in many investment portfolios. Tech stocks tend to put growth ahead of all else, so dividends are rare and the shares tend to be volatile. Investing in the tech sector requires a risk-hardened stomach, especially if you want to buy individual stocks.
Financial
The finance sector is the backbone of the American economy. This group is mostly banks, but not all banks have the same goals. Investment bank behemoths like JP Morgan Chase and Goldman Sachs appeal to a much different clientele than smaller banks like Ally and KeyBank. If you lend money, you’re in the financial sector.
Banks make up the majority, but they aren’t the only stocks in the finance sector. Brokerage firms and money managers like Charles Schwab and BlackRock also reside in the finance sector, as do insurance issuers like Travelers Companies and AIG. The latest entry to this sector is FinTech firms, which combine traditional financial services with innovative technology in order to reduce friction. The finance sector isn’t necessarily a fast-growing one, but most of the companies here will pay dividends, making it an ideal sector for income production.
Healthcare
Death and taxes might be the only two guarantees in life and we don’t like to think of either of them. But reality is beginning to set in as the baby boomers age and retire – the healthcare sector will inevitably expand as the older population needs more frequent medical services. The healthcare sector can be a lucrative one because it contains not only medical service providers like hospitals, but also drug developers, biotech firms, and medical device manufacturers.
The healthcare industry is sure to see growth over the next decade, not just from advances in medical science, but also due to the volume of patients about to require care. However, since the sector contains companies ranging from insurers to vaccine developers, you might be better off using sector-specific index funds to reap rewards from this industry.
Consumer Discretionary
Finally, the consumer discretionary category is one to keep an eye on, especially since consumers have largely patched up their personal finances with the government assistance distributed during the pandemic. Consumer discretionary is the counterpart to the consumer staples sector. With consumer staples, you have products and services with inelastic demand – food, beverages, and tobacco. Consumer discretionary is the products that people buy when the economy is strong, such as apparel, cars, durable goods, media, and recreation.
With inflation high and consumer demand strong, the consumer discretionary sector is an ideal place to invest. Many of the goods offered by these companies are in short supply like vehicles and appliances. When demand is high, these companies have unique pricing power and can rake in outsized profits. Retailers like Nike, car manufacturers like Tesla and Ford, and even media conglomerates like Disney can see their stocks soar when the economy is pumping.
Speak with an Experienced Financial Advisor
Investing in the stock market can be a risky, but lucrative endeavor. Whether you’re getting started in investing, or looking to diversify your existing portfolio, it’s always important to work with an experienced financial advisor. The team at Good Life Mount Pleasant is here to assist you with understanding your investment options.
Disclosure
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.
All indices are unmanaged and may not be invested in directly.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Stock investing includes risks, including fluctuating prices and loss of principal.