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Sector funds generally focus on particular
economic segments such as health care, financial services or technologies. They are an
ideal way of investing in a specific industry related opportunities without exposure to
one particular company. Sector investing is more aggressive that an index fund but is less
aggressive than investing in one particular company. The following approach should be
considered when investing in sector funds:
Portfolio - Sector funds should be part of a balanced portfolio. Evaluate your
portfolio in terms of its relative level of risk, your investment objectives and exposure
by industry. An investment in a particular segment should complement your overall
portfolio. Sector funds provide an opportunity to complement your individual stocks and
provide diversification into other industries which are not in your current portfolio. For
instance, a portfolio heavily concentrated into individual technology based stocks could
be diversified by a sector fund in the health care field.
Hold Long Term
- Sector funds should be considered for longer term goals and your initial investment
should be planned to be held at least three years. Sector funds are more volatile as they
focus on narrow business segments. In the event of sudden bad news or a dramatic shift in
the market's view of a particular industry outlook, you may have to sell your investment
at a loss if you need to liquidate your investments in the short term.
Fund - Some sector funds invest in a group of industries that span multiple
related industries. For example, a health care sector fund may be composed of drug retail
stocks and biotechnology stocks. It is important to understand what makes up the fund and
compare the fund's strategy with individual stocks that you may own. This is important
because sector investing tends to reduce diversification in your portfolio in hopes of
increasing overall portfolio performance. For example, a portfolio already containing
several computer based companies may want to avoid a technology sector fund.
- Industries go through cycles and revolutionary changes. You should invest in a sector
fund because you believe that the industry is in the midst of a new cycle or revolutionary
change that will expand opportunities for several years. Sector funds can be used to
participate in a consolidation wave within a specific industry without the risk of owning
one specific stock.
Investing - If you are a value investor, consider investing in industries that
have already started to turn-around. This strategy may reduce your overall returns but
should prevent catastrophic losses. Remember, investing in sectors can be dangerous. For
instance, the nuclear industry has yet to recover from the nuclear scares of the mid
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Investing in sectors can be dangerous.
The nuclear industry has never recovered from the nuclear scares of the 1970s.
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