Guide to Stock Sectors and Portfolio Allocation
Updated: Dec 24, 2022
The stock market is comprised of 1000s of different companies. All ready for you to invest in with a few clicks of a button. Choose the right stocks and you could make a lot of money, choose the wrong stocks and you could lose a lot of money. Each company in the stock market falls into "sectors" or categories. There are eleven basic sectors. Diversification among the different sectors can help balance your portfolio and hedge against risk. Remember though, the risk of the stock market can never be removed completely. Below is description of the eleven sectors:
Communication services
The communication sector includes companies that provide services like internet and phone plans. It also includes some media and entertainment companies like Netflix. Examples include AT&T
Consumer Discretionary
Companies in this sector are considered luxury items or services. Products include cars, jewelry, sporting goods, and more. Examples include Starbucks and Amazon
Consumer Staples
The consumer staples sector includes companies that revolve around products like food, beverages, household goods, and other household services. Examples include Procter & Gamble and Kroger
Energy
The energy sector deals with companies that work in the oil and gas industries. It does not include renewable energy companies. Also included are companies that provide equipment or services as well. Examples include ExxonMobil and Chevron
Financials
The financial sector includes companies in finance and investments. This includes banks, credit unions, insurances, and mREITs. Examples include Bank of America and Goldman Sachs
Health Care
The healthcare sector includes pharmaceuticals, health care research, biotechnology, healthcare services, and equipment suppliers. Examples include Johnson & Johnson and AbbVie
Industrials
The industrial sector covers a wide range of companies that typically involve heavy equipment used in construction and manufacturing. Examples include Caterpillar and Deere and Company
Information Technology
Almost all major technology companies fall under this sector. They develop technology items and services like computers, microprocessors, and more. Examples include Visa and Mastercard
Materials
The materials sector is made up of companies that manufacture chemicals, construction materials, or even containers used in the construction industry. Examples include DuPont and Eastman Chemical
Real Estate
The real estate sector includes Real-Estate Investment Trusts (REITs), realtors, and other companies. Examples include O Realty and STAG Industrial
Utilities
Utilities are exactly what they sound like, utility companies. These include natural gas, electrical, and water companies to name a few. Examples include Consolidated Edison and NextEra Energy
Each sector has different performance metrics. Some sectors might perform better than others throughout the day, year, or even decade. Below is an example of sector performance on 8/20/2021 and their corresponding one year change:
Imagine if you had put all of your investments in the Consumer Staples sector. Your portfolio's performance would be just under half of the average of all the sectors, meaning you would have missed out on nearly an additional 15% return. This is only an example as past performance does not dictate future performance. When building your portfolio you don't need a perfect balance of every sector. Analyzing your portfolio periodically can help you identify areas that you're underweight in. You can use this information to research new stocks that might fit in your portfolio.
Your broker usually has tools available to help you see what your allocation is versus various benchmarks. Here is a snapshot of my portfolio allocations against the SP500 benchmark inside TD Ameritrade's website:
Matching a benchmark asset allocation isn't required if you like the stocks that are currently holding. Using benchmarks like the SP500 can help beginners build a portfolio that is backed by logic instead of random choices. Looking and investing into all of the eleven sectors can give you a balanced return. Ultimately, you can build a portfolio with any stocks you want. The key element to remember is that you're investing in companies that you want to hold and have thoroughly researched.
Happy Investing!