When you think of investing, you might feel a little nervous. After all, many of us think of stock picking when we think of investing. The idea that big losses could come as a result of choosing the wrong thing can mean holding back.
But what if you could invest in sectors instead?
One way to reduce some of the risks of investing is to invest in a wider swath of the market. Sector investing can be one way to do this.
What is Sector Investing?
Rather than just choosing one stock, with sector investing you invest in many stocks in one area of the market.
Markets are divided up by sectors. These are groups of companies that share similar characteristics. Some of the common sectors recognized by investors include technology, healthcare, communications, utilities, and financial services.
You don’t have to choose to invest in one utility company, only for it to go bust. Instead, you could invest in the utility sector, and instead get shares in lots of different companies. If one company tanks, your whole portfolio doesn’t go down as a result because the other securities in the utilities sector might still be doing well.
Sector investing allows you to benefit from the fortunes of an entire sector. It’s usually possible to invest in mutual funds or exchange-traded funds that follow a sector. That way, you get exposure to the entire sector — or at least a good chunk of it — with a single investment.
If you are looking for a good sector to invest in, you can start with our safety scores.
As you can see, things are a bit shaky in the energy sector. However, the technology and communications sectors are doing pretty well.
Don’t Rely On One Sector for Your Portfolio
Of course, you don’t want to rely on only one sector for your entire portfolio. Just as it’s a bad idea to pin all your financial hopes on stock, you don’t want to make the same mistake with sector investing.
Diversity is important in any portfolio, and that includes diversity across sectors as well as across asset classes and geography. And remember, sectors do well and do poorly as other investments do. In some cases, just as would with other investments, you might need to change things up a little bit.
Have different sectors in your portfolio. When one sector is doing well, consider selling, taking your profits, and then using those profits to invest in a sector that might be up and coming. It’s very similar to maintaining asset allocation or buying low and selling high with individual equities.
Subsectors and Investing
Just as the equities on the market are broken down into different sectors, the sectors themselves are also broken down. In technology, you might see the sector broken down into areas like semiconductor memory, consumer electronics, and software infrastructure. Communications services might include pay TV and telecom services subsectors.
You might be able to find ideas for sector investing by breaking it down further. It’s possible to find mutual funds and ETFs that focus on subsectors, as well as larger sectors.
Using Sector Investing to Find Ideas for Individual Equities
Of course, sector investing isn’t just about using funds to get a whole swath of the market. You can use sectors to find investing ideas. For example, look at healthcare.
In general, healthcare has a high safety score. You can look in healthcare to see what possibilities there are with high safety scores. The medical distribution subsector has the highest safety score in the healthcare sector. Once you open that up, you can see that there are some individual stock ideas with good safety scores.
So, even if you don’t get into investing in entire sectors, it is still possible to use sector investing to find good ideas for your portfolio. Look for some of the top choices in the sector and use those to build a portfolio that is likely to see pretty good returns.
The market has thousands of stocks, and it can be time-consuming and difficult to look through everything. Organizing your search and starting with sector investing can help you manage the information, look for standouts, and get the best value for your investment dollar.