Basics of Sector Investing

Learn what each sector is and how to invest in these sectors during different economic cycles.

There are many different sectors to look at when investing and building a portfolio, all you have to do is look around your own house. Right away you will see the different sectors.

Take the consumer discretionary and the consumer non-discretionary (also called consumer staples). Within each sector there are sub-sectors or sub-industries. For example in the consumer staples sector, look at toilet paper, toothpaste, shampoo and soap, look at the company names on these items. Now look around your home for the consumer discretionary items you own, the computer and all the peripherals, television, Internet service, do you have cable or satellite, new shoes, did you go out to eat or order a pizza.

Anything that you bought that you didn’t have to buy is pretty much consumer discretionary. As you look around your home and work place, you can probably see some company that represents every one of the following sectors. When you look at the following industries and sectors, take note that web sites might divide them up further, for example making defense its own sector.

Sectors and their sub-industry

  • Consumer non-discretionary. These companies sell products that consumers need to buy. Like toilet paper, toothpaste, tissues, laundry soap, dish soap, shampoo and aspirin. The sub industries would be grocery stores, drug retail, food distributors, household and personal products and soft drinks.
  • Consumer discretionary. Clothes, apparel, shoes, cable, computers, electronics, Internet, restaurant, gambling and casinos, department stores, home improvement stores, furniture, movie and entertainment and leisure products.
  • Energy. This includes all the oil producers and drillers and including natural gas and coal.
  • Financials. This includes all types of banks and REIT (real estate investment trust). Also included are all types of insurance and mortgage lenders.
  • Health Care. Managed health care, biotech, pharmaceuticals and health care supplies.
  • Industrials, this is a very broad sector. Some of them are the aerospace, defense, airlines, construction, highways and railroads, machinery, ports, office supplies and trucking.
  • Information technology. This includes, communications equipment, computer hardware, storage and peripherals, data processing, home entertainment software, IT, business software and semiconductors.
  • Materials. Another very broad sector that includes the chemicals, construction materials, metals and mining, forest products such as paper products, metal and glass containers, steel and precious metals and mining.
  • Telecommunication services. Such as alternative carriers and wireless companies.

These sectors are very broad and wide-ranging and your choices for investing in these sectors and industries are just as varied.

What is sector investing and why invest this way.

Sector investing is investing in certain sectors and industries. You would have a portfolio of a sector or sectors that you feel strong enough about to invest in.

One reason to invest in sectors is to be in the right industries at the right time of the economic cycle. If you can pick the right sector(s) as they are about to start moving back up, then you can increase your profits of your overall portfolio. With the new president about to take office and his talk of rebuilding America, the thought of infrastructure and materials and construction industries comes to mind.

Another reason to invest in sectors is to be diversified. Spread your investments among numerous industries. By being diversified in several different sectors, you can spread your risk out and hopefully be in more up sectors than down. For example, if you had been invested in the copper, gold and or silver mining industry during early 2008 through late summer 2008 and at the same time been invested in the homebuilding industry at this time. Your mining investments could have been better then the homebuilding companies were bad. Include several of these sectors in your investments to diversify your portfolio.

The risks.

The risks of trying to pick just one sector and investing all or a large portion of your investment money into it is that you could end up losing a lot of your money. You would have to continually have good timing to know when to sell this sector and move onto the next one. Another risk is to always follow the hot sector, you keep reading about gold and silver and copper going up, up and you decide to put a lot of your money into that one sector. By that time, you might have missed the majority of the upward move of the mining stocks and they were already heading down. Chasing the hot sector or the hot stock for the individual investor hardly seems to work out. That is why diversifying works.

Sector Timing and the Economic Cycle

Right now in late 2008, do you feel that the oil sector has bottomed and that it will start heading up again, or maybe you feel that will happen as we get near the summer driving season again. Maybe you feel the homebuilding or the financial sectors have bottomed, and now is the time to invest in those sectors.

By timing these sectors and the economic cycles and moving out of one sector into another is called sector rotation. How can you time these moves right, by paying attention to all of the news and charting each sector. By investing in several different sectors at a time and being diversified you could limit your losses if you made a mistake in one sector.

Sector Stocks, ETF’s and mutual funds

You can look at each sector and industry and choose certain stocks in each that you would want to invest in, or you could invest in Exchange Traded Funds (ETF) for a sector. ETF’s are a good way to invest in a certain sector and be diversified in that sector at the same time. There are also mutual funds that are sector specific as well.

If you pick just a couple of stocks in one sector, you could be right about the sector, but wrong about the stocks you picked and still lose money. With using ETFs you would have many companies in the right sector and maybe 2 out of 10 companies didn’t do well, you would still come out ahead being in the right sector.

Sam Montana © 22 December 2008


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