How to go about sector diversification?Tuesday, October 27, 2009 2:15 pm
Several investors purchase a wide market index fund and think they are as diversified as they are supposed to be. However, it’s better to take your diversification to bigger advantage of outperforming areas of the stock market.
For a more practical approach to portfolio diversification, you need to consider stock market sectors.
Due to the outburst in the number of exchange-traded funds since the beginning of the century, individual investors have supreme access to indexes that include not just the wide stock market but individual market sectors as well.
Such an access is exceedingly helpful as money in the stock market does not normally pour into particular stocks alone. Money usually flows into whole market sectors. If the banking sector is beginning to flourish, money will normally flow into the whole sector to benefit from the stable performance and development that the whole sector is taking advantage of. Evidently, there will be certain stocks within the sector that draw more attention than the rest; however the sector as a whole will gain from the influx of funds.
Funds also tend to pour in and out of sectors. You will be able to pick sectors at any given time, which are doing well and sectors that are not doing well. As an investor, you need to identify sectors that are thriving and hold stocks in each of them. In such a case, if one of the sectors you hold stocks in has a setback of luck and money begins to flow out of it, investments would still remain intact in several other booming sectors.
Consider allocating your investments out into sectors like Services, Technology, Financial, Conglomerates, Healthcare, Consumer goods, Utilities, Industrial goods and many others as you begin with your sector diversification.
Thus, sector diversification can add a new meaning to your overall investment portfolio.