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When should I invest in sector funds?
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New York - 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:
  • Balance Your 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.

  • Understand the 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.

  • Select Carefully - 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.

  • Consider Value 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 1970's.

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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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