One of the most important parts of knowing where and how to invest in a portfolio is to understand the notion of diversification. As we all know from Markowitz Portfolio Theory, diversification is incredibly important to remove a much risk from an investment as possible. This involves shifting stocks into what we call market sectors. Depending upon who you speak to, these can vary, but for the most part the following sectors are the most commonly followed and bought:
- Consumer (Discretionary)
- Consumer (Staples)
Additionally, Investopedia provides the following details on sectors:
An area of the economy in which businesses share the same or a related product or service. Economies are comprised of four sectors. The primary sector involves the extraction and harvesting of natural products from the earth (e.g., agriculture, mining and forestry). The secondary sector consists of processing, manufacturing and construction. The tertiary sector provides services, such as retail sales, entertainment and financial services. The quaternary sector is made up of intellectual pursuits, like education.
An industry or market sharing common characteristics. Investors use sectors to place stocks and other investments into categories like technology, health care, energy, utilities and telecommunications. Each sector has unique characteristics and a different risk profile.
Sector performance, at least on a macro level, is often attributed to the performance of the largest companies in each sector. So for example, if shares of Exxon-Mobil (XOM) are declining, so will the broader energy sector because XOM is so large.
Stay tuned for ways to use sector-diversification in your portfolio.
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