- Diversification is a strategy for spreading out the risk in your portfolio
- You can diversify your portfolio by sector
- There are 11 different sectors reflected on the U.S. stock market
Investing can be scary. It always involves some risk, and knowing where to put your money can be confusing to figure out on your own.
That’s why we’ve boiled down our investing philosophy into three basic principles that we hope can guide you as you make your first investing decisions. We call our approach the Stash Way. Here are its three pillars:
- Invest for the long-term
- Invest regularly
What is diversification?
Diversification is a big word but it’s actually a pretty easy concept to understand.
If you know the old saying about not “putting all your eggs in one basket,” then you’ve already got a basic understanding.
Essentially it’s a strategy for spreading out the risk in your portfolio by buying a broad range of stocks, bonds, and funds. Beyond that, though, you can (and should) diversify your stock holdings and your bond holdings; you can also diversify your holdings by region. And you can diversify by sector.
What’s a sector?
A sector is a building block of the economy that’s made up of multiple industries. (An industry is a specific group of companies that produce the same types of products or services.)
Think of the factories that manufacture the cars you drive, or stores that sell the retail products you buy every week, or the businesses that make the medical equipment that’s used for your health care. Each one belongs to an industry and a sector.
The key point is that the sectors don’t always perform the same way at different periods of an economic cycle. Tech companies could be racing ahead when the economy is expanding while companies selling consumer staples might be growing more slowly.
Here are the 11 different sectors reflected in the U.S. stock market:
- Real Estate
- Health Care
- Consumer Staples
- Consumer Discretionary
- Communication Services
Diversifying your portfolio by sector
Since companies make up the industries and sectors, you can invest in sectors by purchasing stock issued by these companies.
For instance, the Consumer Staples sector contains companies such as cigarette manufacturer Altria, packaged food company Hormel, as well as drugstore chain Walgreens and the retailer Walmart.
The Communication Services sector comprises companies such as Google and Facebook, but also AT&T, Disney, and Verizon.
Important note: While diversification could help you spread out your risk, it is not a fool-proof strategy. During economic recessions and other serious periods of market volatility, it’s possible that all sectors (i.e., the broad stock market) could lose value. After all, investing in the stock market always entails risk.
You can also purchase ETFs that include the stocks of the various sectors. These funds, which are baskets of stocks, can focus on real estate, utilities, healthcare, and materials, among others.
Want to learn more? You can purchase ETFs that include the stocks of the various sectors. These funds, which are baskets of stocks can focus on real estate, utilities, healthcare, and materials, among others.