 Personal Finance PowerPoint Presentations, Stock Sectors. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia Sector Breakdown, which you can find online. Take a look at the references, resources, continue your research from there. This is by Adam Hayes, updated February 23, 2022 in prior presentations. We've been looking at investment goals, investment strategies, investment tools, keeping in mind the two main categories of investments. One being the fixed income, typically bonds. The other being the equities, typically stocks. Keeping that in mind, we're asking, what is a sector breakdown? A sector breakdown is the mix of sectors within a fund or portfolio typically expressed as a portfolio percentage. So if you look at your portfolio, if you look at your investments, if you look at all the assets that you have, you can look at the total assets at the bottom, and you can then try to break out by sector the categories of assets. And it's useful then to take each of those categories divided by the total and get a percentage. You can look at that as a pie chart type of analysis because all the percentages will then add up to 100% of your portfolio. That is a quite useful tool because when we're comparing to other portfolios, possibly benchmarking to some famous investor or something like that, we can't compare dollar amounts because they're going to have more dollars than we do typically. But we can look at their ratios in terms of how much they are investing in relation to their total portfolio, use that as a kind of guide for us as well. We can also use standard kind of benchmark guides to think about how much we should have invested in different sectors, and we might use strategies such as investing in like an index funds, for example, averages in the market to basically help us to get that diversification that is thought appropriate for whatever goal we are trying to achieve, be that retirement type of goal or saving for some kind of goal such as tuitions, for example. So sector designations can vary depending on the funds investment criteria and overall objectives. So clearly when you're investing in funds, note that mutual funds themselves could be designed in such a way to have the diversification within a mutual fund or an ETF. So that's one way that you can kind of use this diversified type of approach to breaking this information down. If you're not using like a one mutual fund to do that or possibly using multiple mutual funds or indexes to break down this type of ratio analysis and trying to hit a goal in terms of what you think the optimal ratios will be, it could be a little bit complex because clearly as things change over time, as some things earn money faster than other things, then your balance is going to get a little bit skewed and you're going to have to rebalance these types of things depending on whatever your goals are, what your time horizon is, what your risk tolerance is. So understanding sector breakdown, a sector breakdown is provided for fund analysis and can help an investor to observe the investment allocations of a fund. Sector investing can be a significant factor in influencing investments in the fund. A fund may target a specific sector, seek to diversify among sectors or generally have sector variants that results from investing from a broad universe. So if we look at different funds themselves such as mutual funds, for example, some investors might say, hey look, I'm trying to find a mutual fund that's going to do everything for me, right? They're going to try to optimize or have my diversification and have that diversification actually change as I get closer to my goal, possibly retirement, and try to optimize that mix that would be optimal for my particular age range. Or again, you might try to do some analysis yourself to diversify in that way using something that's a benchmark or hit. So a sector fund would have an allocation of 100% to a specific sector. So for example, you might use index funds that basically are targeting particular sectors and then you might have multiple index funds together that have different sectors that can then make up your overall portfolio, for example. And that's one way that you can kind of approach this. Some funds may have restraints on sector investments, therefore fund analysis is used by fund managers to exclude specific investments. This often occurs with environmental, social, and governance ESG focused funds. So this is like nice in concept because when you put your money into a mutual fund, for example, you don't have a lot of control of where that money is going specifically within the fund. It's being determined by the fund managers or the terms of the fund. They might be putting some of that money to companies that you don't agree with and you wouldn't want to be putting your money towards those companies. However, on the downside, you can see how this can be easily politicized, meaning if companies have to go through a series of hurdles in order to be approved in a certain category, then that might be a way to bar inclusion or reduce competition for particular companies. And so I think it can be politicized and manipulated. So it's kind of a double-edged sword there. But in any case, these funds seek to exclude industries or companies that their investors consider undesirable for various reasons. This may include an industry grouping such as tobacco producers in one fund or oil exploration companies in another fund. Fund companies regularly provide sector reporting in their marketing materials. Sector breakdowns provide a representation of the sector allocations of the fund's assets often on a monthly or quarterly basis. Some funds may even report sector breakdowns daily on the fund's website. GICS Sectors. Sectors are typically considered to be a broad classification. Within each sector, numerous sub-sectors and industries can also be further delineated. So it depends on how much, how deep we want to go into diving into the details. So the global industry classification standard, also known as the GISC, is the primary financial industry standard for defining sector classifications. The global industry classification standard was developed by index providers MSCI and the S&P Dow Jones. Its hierarchy begins with 11 sectors which can be further delineated into 24 industry groups, 69 industries, and 158 sub-industries. It follows a coding system that assigns a code from each grouping to every company publicly traded in the market. The GISC coding system is integrated throughout the industry allowing the detailed reporting and stock screening through financial technology. The 11 broad GISC sectors commonly used for sector breakdown reporting include the following. So we've got energy, we've got materials, industrials, consumer discretionary, consumer staples, healthcare, financials, information technology, telecommunication services, utilities, and real estate. So when you're watching like say stock market channels and so on, they will often be breaking these categories down. They're going to be talking about energies and financials and utilities or real estate and so on and so forth. So diversification and sectors, a diversified stock portfolio will hold stocks across most if not all GISC sectors. So in other words, when you're looking at your overall investment strategy, remember you're thinking most likely like fixed income and then you're thinking the stocks. So the bonds, you want some bonds typically and then we want the stocks. On the stock side of things, we want to be diversified within the stocks themselves. So we have different strategies we could use. We could use individual stocks and try to diversify across basically these sectors and so on and so forth. That could be quite tedious, but it take a lot of time. You could also use index funds, index funds which are kind of average funds that are given an average of each of these items, kind of like taking a survey, for example, of people to see what they're going to vote for or something like that. So you can use that approach because the indexes are typically going to have less management fees and then you can try to find indexes that give you exposure to each of these categories. That's another approach that you can use. Or you can try to pick basically one index fund, for example, or one mutual fund, for example, that tries to invest in a diversified way amongst all of the categories and that would be kind of like the easiest, most hands-off type of approach that you can use. You also, of course, have the idea of do you want to be using index funds or do you want to be using more managed funds? So you can have managed funds, for example, people that are trying to beat the market and mutual funds in each of these particular industries. So now you're hiring a professional that you're hoping can outperform the index in each of these areas. And so the question is, can they do that over the long run and so on? Or you can have a managed portfolio that's going to give you diversification over all of the funds and try to give you, and the people that manage that funds, those kinds of funds would argue that you should have different allocations likely over time depending on market conditions and they can know what those market conditions are and so on. So those are some ways you can use this in an investment strategy. So diversification in sectors. So a diversified stock portfolio will hold stocks across most, if not all, GISC sectors. Diversification across stock sectors helps to mitigate idiosyntric or unsystematic risk caused by factors affecting specific industries or companies within an industry. So in other words, if you're invested in one area of materials, for example, there could be factors that take that sector down but doesn't impact the rest of the sectors as much because they're not completely tied together in their workings. You could have other things that take the whole stock market down like a recession or depression where everything would go down and possibly the bonds that you're holding on to could be saving your diversification there. So sector indexes can also be used by investors seeking to invest in the growth prospects of a single sector. Investment companies offer passive index funds that seek to replace each of the 11th GIS or CS sectors. So the Vanguard Information Technology Index Fund is one example of a passively managed mutual fund that seeks to replace the holdings of the MSCI-US Investable Market Information Technology Index. The strategy is also available in investors through an exchange traded fund, the Vanguard Information Technology ETF. So we talked about the differences between an ETF and a mutual fund in prior presentations. If you want to dig into that in more detail, what is a good sector breakdown for a portfolio? A well-diversified portfolio should have access to as many sectors as possible and not concentrate too many funds into any single sector or related sector. You may also want to apply the 5% rule with sector funds. For example, if you want to diversify within a specialty sector such as biotech, commercial real estate or gold miners, you simply keep your allocation to 5% or less for each. What are the major industry sectors? These range from utilities to consumer staples to technology. The 11 GIS recognized industry sectors are listed above. The GIS subdivides this into 24 industry groups such as automobiles, banks, and apparel companies. What is the sector breakdown of the S&P 500? As of June 31, 2022, the sector breakdown of the S&P 500, which is a common kind of like an index fund that is used as a benchmark oftentimes. So we got the information technology 28.7%, healthcare 13.1%, consumer discretionary 12%, financials 11.3%, communication services 10%, industrials 7.8%, consumer staples negative 6.1%, energy negative 3.4%, real estate negative 2.7%, materials negative 2.5%, utilities negative 2.5%.