Sector investment approach

Basically, there are three important things that greatly affect the performance of a particular stock. The first thing is an individual company’s performance. The second is the performance of the market as a whole. The third is the total progress of the company’s sector that we are interested in. Just as an individual company's stock rises or falls depending on the demand and supply forces in the market, a company's stock also tends to fluctuate with the fluctuation in its sectors.

So you must be thinking here- What are Sectors? Well, the economic definition of Sector says- ‘Sectors are groups of companies that perform similar functions within the economy’. And the definition of sector analysis does as- ‘Sector analysis involves dividing the overall market into sectors and then studying the performance of each sector individually, so that sectors can be compared to each other or to the market as a whole.

Sector Investment Approach basically segregates various sectors into different categories like consumer staples, consumer services, energy, financials, health care, industrials, technology, transportation, and utilities.
Thus, the sector investment approach is beneficial to an investor in three basic ways. They are:

• To guide diversification
• To find sectors with above-average performance
• To time the market.

There are certain sectors that are more volatile than others. Hence they tend to react more strongly to changes in the overall economy. For example, the information technology tends to do well when the overall market is rising. On the other hand, when the general economy is falling, this is the sector that takes the heaviest beating. Consumer staples, on the other hand, are more stable i.e. they don’t get a massive push when the economy is booming and neither do they suffer from a steep fall during recession periods.

To use sector investment approach to guide diversification, you need to select a balanced portfolio consisting of both stable and volatile staples. Due to this when the economy is strong, you will benefit from the growth in the volatile sectors. On the other hand when the economy is suffering from a down turn, you will be saved from windfall losses due to the presence of the stable sources.

A more risky strategy is focus your investments in those sectors which are doing vey well given the current market scenario. This is generally known as Momentum Investing. The idea here is that sectors that are outperforming the market will attract more investors. Due to this, the demand for these sectors will rise thereby increasing the price here.

The last strategy is the Market Timing strategy which is actually the opposite of the Momentum Investing strategy. Market timers are the trend spotters of a sector. The idea is to bank upon the cyclical performance of the sector and chart the rise and fall of a sector. Market timers try to sell their sector stocks just before the sector peaks, and buy their sector stocks just before the sector troughs.

If you want to find out information about sector performance, you can visit any of the online analyses websites. You see latest news updates and statistics for each sector, lists of the best-performing stocks within each sector, and charts that compare the performance of sectors to each other.