Market Sectors 101: Where Should You Seek Exposure?

How well do you know the equities markets? The fixed-income markets? The forex markets? Markets for alternative investments, like cryptocurrencies and precious metals?

If you’re like most non-professionals, you’re probably reticent to get too far out over your skis. Investing is far more complicated than it looks; the advent of high-speed trading and increasingly sophisticated money management theories make it that much less accessible for laypeople. 

At the same time, high-touch finance professionals like San Francisco-based financial advisor Daniella Rand encourage clients to arm themselves with basic knowledge about the key sectors that make up broader markets — particularly the equities and fixed-income markets, which factor heavily into tax-advantaged retirement plans and taxable portfolios alike. It’s always a good idea to know your funds’ sector breakdown, for instance.

Here’s a sampling of key market sectors. As always, speak with a licensed financial advisor before putting your money to work, and never invest more than you can afford to lose. 

Financials

This sector includes companies involved in lending, investing, insurance and other financial activities. Financial firms typically perform well during periods of economic expansion, particularly when benchmark interest rates (and interest rate spreads, a key revenue driver) are high.

Energy

This sector includes companies involved in the production, transportation, and storage of fossil fuels like oil and gas. Depending on how the sector is defined, “energy” may exclude companies involved in the production of renewable energy, such as solar and wind; these firms may be included as part of the “technology” sector, and increasingly broad catchall. 

Healthcare

This sector includes companies involved in a wide range of healthcare and healthcare-adjacent fields — everything from pharmaceuticals to medical device manufacturing to clinical care and beyond. Some healthcare subsectors are considered “defensive” plays, since the need for medical care doesn’t track economic growth.

Industrials

Industrials firms use a staggering variety of value-add processes to convert raw materials and unfinished components into fabricated goods. Some industrials subsectors are highly cyclical, meaning their performance tracks the broader economy, and public policy (such as trade and tax policy) may have significant ramifications for specific firms or subsectors.

Materials

The materials sector includes firms involved in the extraction and refining of raw materials, including minerals and basic chemicals.

Technology

“Technology” is a broad sector that includes everything from cloud-based software producers to high-tech hardware manufacturers to alternative energy solutions providers. Stocks of early-stage technology firms, in particular, can be quite volatile, and the sector as a whole is considered riskier than, say, utilities.

What Does “Diversification” Mean to You?

Much is made of the importance of a diversified investment portfolio. It’s true that investments tend to perform better over the long run when they’re distributed among a wide range of market sectors and instruments, including some outlined above.

However, there’s no such thing as a “cookie cutter” approach to diversification. Your wealth, risk appetite, near- and long-term goals, and other factors will influence the composition and weighting of your portfolio. If you’re not sure where to start, speak with a licensed financial advisor — that first conversation could be the start of a fruitful partnership that puts you on the road to financial independence.

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