Sectors, Industries, and Diversification
Contributed by Mary Thomas, Director, OKI Tri-State Chapter
Sectors are broad categories of stocks, each one containing a number of industries. For example, Healthcare is the name of one sector, with Drugs as one of its many industries. Financials is another sector with Banks and Insurance as part of its industry. We buy stock in a company which is in a particular industry that is part of a specific sector. For example, Wal-Mart Company is in the Retail Industry which is a part of the Consumer Cyclical Sector. Within the ten (10) sectors are over one hundred (100) industries. In the business world Standard & Poor's, Value Line and the DOW all use 10 sectors. Below are the sectors as listed by the DOW.
1. Basic Materials
2. Consumer, Cyclical
3. Consumer, Non-cyclical
Value Line uses a "sector approach" to investing. First, select 3-4 sectors that are most attractive from the Value Line Sector Ratings. Second, select the most attractive industries within the sector from the Industry Timeliness ranks. Third, select one or two of the most attractive stocks within those industries. Value Line Investment Survey
When diversifying your portfolio Sectors are easy to work with. Normal screening techniques can, also, be used to find the best looking stocks within a sector.
Another way to diversify your portfolio is by company size. NAIC investors like to also diversify by size based on the sales (or revenues) of a company. A good rule of thumb is, small companies 25%, medium size companies 50%, and large companies 25%. One of the NAIC principles is diversification. When you diversify your investment it will help to reduce your risk.
Click here for a PORTFOLIO DIVERSIFICATION TABLE which has Sectors and Industries, with places to write in company ticker, sales and % for each category.