While it is tempting to invest in the sectors of your choosing, this strategy can be counter-productive. For instance, the highest-performing sector would generate a 249% return in 15 years, whereas the lowest-performing sector would produce a 353% return. Investing in stocks in the top 5 sector’s sub-sectors can dramatically increase your return, but the downside is that you run the risk of losing money, so you must make sure that your choice of sectors aligns with your personal risk appetite.
A sector-allocation portfolio can be useful for navigating different economic cycles. The right sector allocation can lead to massive outperformance, while the wrong one can put your career at risk. For example, recent history has shown that sharp equity market downturns often accompany recessions or economic slowdowns. The goal of a sector-allocation portfolio is to recognize such disruptions and move accordingly. It also has the advantage of having less volatility than other types of investing.
The downside of Sector Allocation is that it’s not always possible to predict the direction of the market. You can’t control the market, so sector funds are not suitable for investors with short-term time horizons. However, investors who can stay invested for five to 10 years are ideal candidates. If you have a shorter time horizon, you can reduce risk by utilizing dollar-cost averaging and periodic portfolio rebalancing.
A sector-allocation fund may also provide diversification. Its goal is to generate capital appreciation during economic expansion by investing in stocks with positive fundamental trends. It reduces risk by holding exchange-traded funds and substitutes cash. This strategy also uses exchange-traded funds as a tool to create its portfolio. The Astor’s Fund incorporates these three strategies in one. It seeks to reduce its risk by avoiding sectors with too much volatility.
For investors, sector funds are an excellent way to diversify a portfolio. By focusing on one specific sector, a sector fund can lower overall risk. By investing in the right sectors, it can potentially maximize returns over the long-term. So, while it may seem complicated, the benefits of a well-balanced portfolio are numerous. So, don’t ignore sector allocation. You’ll be glad you did. If you invest in one sector, you can avoid risk by diversifying among the others.
Sector Allocation manages Your Risk:
Investing in a sector fund can help you manage your risk. For example, a health sector fund might hold biotechnology stocks, while a technology fund might focus on companies that produce new products. By investing in a sector fund, you can hedge your portfolio by avoiding these risks. The same holds true for the other sectors of your portfolio. By adding a sector fund to your investment portfolio, you can increase your risk-adjusted portfolio and make it more versatile.
A core holding will be the largest component of your portfolio. Satellites will be smaller percentages of your portfolio. For example, a health fund will hold S&P 500 Index funds as its core holding. While the S&P 500 Index fund is a good core holding, you should also consider other sector funds to diversify your portfolio. If your strategy includes a sector fund, you will be better positioned to handle the risk.
Sector Allocation allow investment in Baskets:
A Tactical Sector Allocation fund invests in a basket of securities to represent a sector. The basket may contain common stocks traded on a local exchange. ADRs and GDRs are shares of foreign companies that are held in custodial accounts of a financial institution. These shares are traded on exchanges around the world. The Tactical Sector-Allocation Fund’s underlying index contains an allocation to cash.
For aggressive investors, sector-allocation funds are a good choice for diversification. FSI funds have a core holding of S&P 500 index funds and satellites of sector-specific stocks. If you want a more diversified portfolio, buy a S&P 500 index fund and a sector-specific fund. A good FSI fund will provide diversified exposure to sectors of the market, and will provide no additional risk to your overall portfolio.
A sector fund concentrates on one subsectors of the economy. Morningstar groups them in larger peer groups, but this distinction is merely for analytical purposes. Because sector funds are more volatile, investors should be prepared to accept higher volatility and risk. Historically, various sectors of the U.S. economy have experienced lower lows and higher highs than other areas. They should also consider tax-efficiency. They are not advisable for those who want to avoid paying tax.