Targeting Market Sectors — Could It Help You Take Aim at Your Goals?

Think about the headlines you often see in the business section: “Tech Stocks Send Market Soaring,” “Retail Sector Weighs on Stock Prices,” “Health Care Gives Indexes Big Boost.” They often focus on specific sectors of the stock market. Maybe you should too — if you understand the risk/reward tradeoff.

Sector Basics
Some of the more widely followed sectors include utilities, telecommunications, technology, health care, biotechnology and natural resources. Investing in a specific sector can potentially result in higher-than-average returns if that sector grows faster than the broader market. For example, although the U.S. stock market has been very strong recently, growth in some technology and telecommunication companies has been even stronger. Of course, sector investments also involve higher levels of risk than diversified investments — it’s possible that all the stocks in a sector will perform similarly, at times declining in unison.

A sector investment strategy may allow you to fine-tune your portfolio to take advantage of companies poised to grow from economic, scientific or social trends and developments. Case in point: The aging American population may create growth for U.S. financial services firms. Baby boomers are in their peak earning years and plowing money into employer-sponsored plans and personal accounts in preparation for retirement.

Introducing Sector Investments Into Your Portfolio
If you decide sector investing might be right for you, given your goals and risk tolerance, the following tips might help you get started.

Diversification may reduce risk — Generally, it’s best to complement core portfolio holdings with a mix of sector investments. Different sectors tend to perform differently in the same economic conditions. The leisure sector, for instance, may do well in a strong economy, but struggle in a weakened economy when people cut back on optional spending. Health care, on the other hand, is a necessity, and therefore may perform better during a recession.

Consider a buy-and-hold strategy — You could attempt to second-guess the economy and rotate from sector to sector, but what happens if you miscalculate? To avoid jumping into a hot market when it’s at its peak, you may want to invest in sectors based on long-term growth potential and hold on to the investments you choose for the long haul.

Look at a sector’s performance record — Although past performance is no guarantee of future earnings, look at a sector’s returns over a minimum of five years. How did it perform in different market climates? Are you prepared for the sector’s inherent ups and downs?

Remember, sector-specific investments may present attractive opportunities, but they also involve higher levels of risk than diversified investments.

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