by S. Wade Hansen
Are You Adequately Diversified?
Far too many investors buy a broad market index fund and decide they are as diversified as they need to be. But what if you could tailor your diversification to take greater advantage of those areas of the stock market that are outperforming the rest? 
If you want to take a more hands-on approach to diversifying your portfolio, you need to look at stock market sectors.
Money Flows Into Individual Stock Sectors
Thanks to the explosion in the number of exchange-traded funds (ETFs) since the turn of the century, individual investors have unparalleled access to indexes that cover not only the broad stock market but also individual market sectors. [Learn more about Exchange-Traded Funds (ETFs).]
Having this access is incredibly useful because money in the stock market doesn't typically flow into particular stocks alone. Money typically flows into entire market sectors. For instance, if the healthcare sector is starting to look good, money will typically flow into the entire sector to take advantage of the strong performance and growth that the entire sector is enjoying. Of course, there will be some stocks within the sector that attract more attention than others, but the sector as a whole will benefit from the influx of money.
Money also tends to flow in and out of sectors. At any given time, you will be able to find sectors that are performing well and sectors that are performing poorly. What you want to do as an investor is identify those sectors that are doing well and own stocks in each of them. That way, if one of the sectors you own stocks in has a reversal of fortune and money starts to flow out of it, you still have investments in many other sectors that are still doing well.
As you get started in your sector diversification, consider spreading your investments out into some of the following sectors (depending on which ones are doing well at the time):
- Basic materials
- Conglomerates
- Consumer goods
- Financial
- Healthcare
- Industrial goods
- Services
- Technology
- Utilities
- And more
[Check out this list of many of the ETFs you can choose from.]
As you can see, diversifying your portfolio is actually pretty simple if you know where to look.
NEXT: Learn more about Market Diversification and Beta Diversification.
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