The Market Has Often Hurt Investors Who Are Too Narrowly Diversified Across Stock Sectors.



Don't let it happen to you.


Do you know which stock sectors you are currently invested in?

It is very important to be adequately diversified across sectors.

As previously mentioned on this site...

The failure to create a portfolio of truly diversified investments is the first pitfall that causes investors to fail to achieve their intended goals.

The stock sectors breakdown of your portfolio is one of the five major elements of true and full investment diversification.



A Sector Is A Group Of Companies That Are In The Same Industry.


A couple of examples would be... the technology sector... or the health care sector.

It is very risky to be invested too heavily in just one or two sectors.

Many people experienced big losses when the technology bubble burst back in 1999.

Those who had large percentages of their portfolios invested in the technology sector saw their balances shrink dramatically.

They lost... big time... not simply because of the technology correction and... not merely because of the companies they were invested in.

They experienced huge losses primarily because... they were not well diversified across multiple stock sectors.

They just had... way too many eggs in the technology sector basket.

At the same time...

While nearly everyone was affected... to some degree... by the market's correction in the technology sector.

There were also those... who had broad diversity across many industrial sectors.

These people were generally unscathed by the market's correction.

An investment portfolio of truly diversified investments must be well diversified... across Stock Sectors or Industries.



Stock Sectors As Defined By Morningstar.


Sectors help investors and investment professionals more easily compare and understand the sector exposures of mutual funds and portfolios.

At Morningstar... the stock market is divided into twelve specific industry sectors. Sectors are based on what companies actually do.

That is... unlike some other sector classification systems... sectors aren't based on expected behavior of the stocks of these companies.

The sectors are as follows:


Information

Software
Companies engaged in the design and marketing of computer operating systems and applications.

Examples include Microsoft, Oracle, and Siebel Systems.


Hardware
Manufacturers of computer equipment, communication equipment, semiconductors, and components.

Examples include IBM, Cisco Systems, and Intel.


Media
Companies that own and operate broadcast networks and those that create content or provide it to other media companies.

Examples include AOL Time Warner, Walt Disney, and The Washington Post.


Telecommunication
Companies that provide communication services using fixed-line networks or those that provide wireless access and services.

Examples include SBC Communications, and Alltel.



Service

Health Care Services
Includes biotechnology, pharmaceuticals, research services, HMOs, home health, hospitals, medical equipment and supplies, and assisted living companies.

Examples include Abbott Laboratories, Merck, and Cardinal Health.


Consumer Services
Includes retail stores, personal services, home builders, home supply, travel and entertainment companies, and educational providers.

Examples include Wal-Mart, Home Depot, and Pulte Homes.


Business Services
Includes advertising, printing, publishing, business support, consultants, employment, engineering and construction, security services, waste management, distributors, and transportation companies.

Examples include Manpower, R. H. Donnelley, and Southwest Airlines.


Financial Services
Includes banks, finance companies, money management firms, savings and loans, securities brokers, and insurance companies.

Examples include Citigroup, Washington Mutual, and Fannie Mae.



Manufacturing

Consumer Goods
Companies that manufacture or provide food, beverages, household and personal products, apparel, shoes, textiles, autos and auto parts, consumer electronics, luxury goods, packaging, and tobacco.

Examples include PepsiCo, Ford Motor, and Kraft Foods.


Industrial Materials
Includes aerospace and defense firms, and companies that provide or manufacture chemicals, machinery, building materials, and commodities.

Examples include Boeing, DuPont, and Alcoa.


Energy
Companies that produce or refine oil and gas, oil field service and equipment companies, and pipeline operators.

Examples include ExxonMobil, Schlumberger, and BP Amoco.


Utilities
Electric, gas, and water utilities.

Examples include Duke Energy, Exelon, and El Paso.



Be cautious of any stock market commentary or an asset protection consultant touting a particular stock sector and suggesting that you should invest a large portion of your total portfolio in that area.

Review your current investment portfolio.

Make sure that you are diversified in such a way as to protect yourself from the possibility that any one sector could dramatically threaten your overall investment balance.

Investors too often suffer due to lack of stock sectors diversification in their portfolios.

Don't let it happen to you.

"Because It Matters"... Jim

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