 Personal Finance PowerPoint Presentation Sector and Specialty Funds Prepare to get financially fit by practicing personal finance Most of this information comes from the Vanguard website, which you can find online at investor.vanguard.com In prior presentations, we've been looking at investment goals, strategies, tools, keeping in mind the two major categories of investments That being the fixed income, typically the bonds, the equities, typically the common stock Also thinking about the types of tools we might be using, including mutual funds, including ETFs Helping us to diversify possibly with less of an initial investment as opposed to investing in individual stocks and individual bonds We've recently been taking a look at different types and categories of the mutual funds Because once we think about investing in funds like mutual funds and ETFs We want to think about what kind of mutual funds then are available to us What type of investment strategy should we be putting together? Here's a quick recap of some of the funds we've been looking at in prior presentations We've got the money market funds, the bond funds, the balanced funds, the stock funds, the international funds And now we're going to look at the sector and specialty funds So remember that our investment strategy, we're going to say, hey, I want a balanced portfolio typically as an individual investor And I could do that by buying individual stocks and bonds, but that's quite costly most of the time So I'm probably going to be using ETFs or mutual funds if I'm using some kind of funds in order to invest Then the question is, do I want to have very minimal amounts of fund such as balanced funds Which are going to be investing in a broad range of funds like bonds, like stocks, within the one fund The easy way to go, or do I want to have more leeway even though I'm still investing in mutual funds Possibly breaking out the stocks, for example, versus the bonds Or possibly getting more in-depth from there, breaking out different segments of stock funds Such as small cap, mid cap, and so on and so forth U.S. versus foreign, as we've seen in prior presentations Giving me a little bit more leeway in terms of where I want my balancing to be at any given time Than simply the balancing standards of the balanced fund Possibly using the balanced fund as kind of like a guide to help me with those balancing But in any case, now we're going to go into the sector and specialty funds Also, keep in mind that if you're talking about a 401k plan or an IRA or any kind of retirement plan You're still thinking usually about pretty much a mutual fund but it's now under the umbrella of, say, a retirement plan or something like that So those things aren't like totally different, you don't want to think about them as totally different You want to think, okay, they're using something similar, a mutual fund of some kind, typically That is now under the umbrella of a 401k or IRA or something like that And that has tax implications related to it that you need to consider So instead of thinking about it, it's a whole new world, no, it's the same world It just now has some different tax implications because it's under the umbrella of some kind of retirement plan Okay, sector and specialty funds focus on a specific industry like precious metals, real estate, healthcare, or energy So when we talked last time, we thought about the U.S. stock funds, for example And we broke them out, you could think about breaking them out into small cap or mid cap or something like that The size of the company, but you also might want to break out your investments by sectors You might want to be having funds that are focusing specifically on real estate, healthcare, and so on Now note, you don't want that to be your only fund because although it might be diversified under these sectors If the economy goes down for that particular sector, then all the stuff in the fund, even though it's diversified within a fund Is not going to be fully diversified because it's only diversified over a small area So you want to use them as a part of your overlying strategy But remember, these funds have a very narrow focus exposing you to more risk and should only be used to supplement an already diversified portfolio So for example, you might be saying that let's say you have a balanced fund right now that is all balanced out for you And that's going to be your strategy, but you think that there's a situation right now where you would be more heavily balanced It would behoove you to be more heavily balanced in healthcare for whatever reason Then you might buy a healthcare specific say index fund for example to help balance you into that area in conjunction in alignment with your overall investment strategy So those are the kind of ways that you might think about using these kind of specific sector funds So what are sector and specialty funds? Sector funds also known as specialty funds are mutual funds and ETS exchange traded funds That is that concentrate on a specific industry or market These funds take a targeted approach and invest only in companies in certain segments of the economy So you're saying, hey look, I think for example, there's a health emergency So I'm going to invest in the medical field, it looks like there's a big need for the medical field So maybe you want to be more heavily there, you don't know which companies to actually invest in You could pick actual stocks or you can pick the funds, right? You might say that it looks to me like all the congresspeople seem to be investing in the same area that they might know something I don't know Maybe I'll invest over there and so then you might invest in mutual funds So because of their narrow focus, they offer less diversification Which means they come with higher potential risks, so you don't want to use them as your only investment strategy Typically because you're not diversified if you do over the broad spectrum only within that certain sector So concentrating on a sector can increase your exposure to risk Sector mutual funds and ETS give you access to a small part of the overall market Such as energy, real estate or healthcare for example Though many of these narrowly focused funds and ETS have the potential to grow You should be equally prepared to experience wide swings in the value of your investments including potentially large losses Because it's more narrow So if you were to invest in an individual stock for example You would expect in the short run that you might have more swings You might look something more like this And hopefully in the long run you get that kind of growth that's going to be happening If you invest in a more diversified portfolio you would think maybe you get a little bit less of these swings That are going to be happening over here because something that happens negatively to one part of the market Might not happen negatively to another If however you are investing in one sector you're doing something closer to investing in just one company Than having a more broad diversified portfolio So once again you would expect more variance to be happening over the short term generally So get more diversified exposure to sectors So if you're not comfortable with the increased risk and volatility sector mutual funds and ETS present Consider a few funds that provide broad coverage of the major industries So whether you're interested in U.S. or non-U.S. stocks Fund options are available that provide a diversified mix of securities and a single fund So choose a specific sector fund If your current portfolio is broadly diversified You may already have sufficient exposure to the sector you're interested in So you might be watching like a Bloomberg or some market analyst or something And they're like hey all the congress people are dumping all their money into the healthcare industry Maybe they're going to pass a law or something like Maybe I should have my money in the healthcare industry So you might start to panic and say well you might have some of your money already in there Because if you're investing in a diversified kind of fund Then some of that diversification is probably in that particular industry So then the question would be how much do I have already invested If I'm already invested in mutual funds Do I want to be more heavily invested in this particular area If I do then I want maybe to add on or purchase another industry specific fund at that point possibly Only consider increasing your exposure to narrowly focused funds If you're comfortable with the added risk Sustainable investing with specialty funds So are you part of the growing community of investors who want to invest in companies with strong environmental social and governance Those are the ESG track records We offer a lineup of ESG investments that can help you achieve your financial goals and match your dollars with what matters to you So again when you're investing in these mutual funds You don't have a lot of control over the individual companies you're investing in oftentimes And you might say hey look they're investing in some companies that I think are wrong I don't think I don't agree with the way that they're doing things or whatever So you might try to invest in such a way that you're more conscious of the companies that you're investing in That's kind of the idea behind the environmental and social governance But again I'm highly, highly skeptical of this kind of thing Because it grows into just a badge So whoever has the capacity to put the stamp of an ESG on a particular fund now Has now increased the value of it because they put this brand on it Which is supposed to mean something but in the future I'm not sure it's going to mean as much as it would Or it might be something different It might just be the cool group The cool group put this tag on it and now you're paying a bunch for it I'm not sure it's actually saving the world or anything So I do agree with the idea of investing in places that you think are that you want to invest in But I'm becoming more and more highly skeptical of this particular strategy Because again I think it gives a lot of power to whoever puts that stamp on it But in any case do your research So what risk can I expect with sector funds? Vanguard classifies sector funds as aggressive Which means they can be subject to extremely wide fluctuations in share prices At a high level here are some of the risks involved with specialty funds We got the industry concentration risk A fund that targets a specific industry will generally be more volatile than one that invests more broadly So you're narrowing down your investment, you're less diversified Therefore more risk is typically the outcome There's a chance that particular problems could affect an entire industry So if you're diversified over the whole health industry and all of a sudden like we cured disease Then the whole health industry would fall apart It's probably not likely that you don't have a whole lot of risk I guess on that particular scenario But you get the concept, right? But other industries still wouldn't would be fine So you would think if there was no risk the smoking industry and booze would skyrocket Because now the risk is gone so you could Any case, we're going too far in the hypotheticals here But you get the point, stock market risk Stock markets tend to be cyclical and can have periods of rising and falling prices So there's a chance that stock prices overall could decline Funds that invest in foreign stocks could be riskier than U.S. stock funds Since foreign stocks can be more volatile and less liquid than U.S. stocks Asset concentration risk Targeting a certain sector could mean the fund invests a high percentage of assets And it's 10 largest holdings The fund's performance could be hurt disproportionately by the poor performance of a few holdings So if you just have a few, a lesser diversification than the big Where your big weights are at The big weighting of your funds into particular companies Those particular companies could have an outsized influence on your whole fund These sector funds are considered non-diversified Which means they may invest a greater percentage of their assets In particular securities than most mutual funds There's a chance the fund's performance could be hurt by the poor performance Of relatively few stocks or a single stock