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What Is Sector Investing?

Ethical and sustainable investing concept. Aim to have a positive impact on the world while also making a profit. Socially responsible investing, ESG factors, impact investing, sustainable investing.

Some investors are drawn to new ideas and strategies because they’re looking to “gain an edge” over the financial markets.

Take sector investing, as an example. It’s a practice of focusing on one or more of the economy’s 11 main sectors. This approach can be appealing since it can help manage market downturns, diversify your asset allocation and strengthen your portfolio. But sector investing, like other non-traditional investments, comes with a different set of risks that are often overlooked.1

The mind of the prudent acquires knowledge, and the ear of the wise seeks knowledge.” Proverbs 18:15 

Sector investing has a narrow focus. It tends to be more volatile than an investment strategy that’s diversified across many sectors and companies. Additionally, sector investing is subject to the additional risks associated with each particular industry. It can be affected by regulatory, political or economic developments that can occur in one industry compared with another.

Remember, that asset allocation and diversification are both approaches that help manage the risk in a portfolio. They don’t guarantee against investment loss. For many investors, the best approach can be asset allocation combined with some sector investing. We have recently  added some sectors to our overall approach, and we believe most of our clients can benefit from the strategy. We will be in contact.

Did you know:1 The Standard & Poor’s 500 (S&P 500) tracks the share prices of 500 of the largest public companies in the United States. That’s why many market participants consider the S&P 500 a reflection of the overall economy. Sector information technology is the largest component of the S&P 500, representing 30.3% of the index. The real estate, materials, and utilities sectors represent less than 7%.

Sector Strategies

Portfolio Concentration: When the outlook for one sector of the economy seems favorable, some investors may choose to overweight their portfolio in a particular sector. For example, an investor could allocate more assets to the financial services sector and fewer to healthcare.

Portfolio Exclusion: Some investors may want to focus on some economic sectors while ignoring others. For example, some may want to exclude the utilities, real estate, or energy sectors from their portfolios.

Faith-Based Investing

It’s important not to confuse sector investing with a faith-based portfolio. Sector investing focuses on concentrating on–or excluding–certain sectors. Faith-based investing looks at all sectors and invests in companies that align an investor’s beliefs and convictions.

“Would you prefer an investment strategy that didn’t invest in companies that support abortions, pornography and other things you might consider objectionable?” wrote Mick Owens in his popular book, Diamond of Life: The Five P’s of Success and Significance. For many Christians, the answer is yes.

When creating a portfolio strategy, we want to make our clients comfortable with how we invest the wealth the Lord has entrusted to them. We evaluate various strategies, including sector investing. But our primary focus is helping our clients exclude disconcerting issues from their portfolio.

  1. Investopedia.com, April 1, 2024

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