As an active investor who buys individual securities, I need to make sure I am very diversified to minimize individual security risk. I have built a strong asset allocation model based on a great deal of research. I still have some work to do to meet my target allocations. However, as my recent portfolio performance has shown I am heavily weighted in financial stocks and will need to shortly turn my attention to my sector allocation.
According to Investopedia, here is the definition of a sector:
Sectors are a broader classification than industries, although some companies (especially more modern ones) can make a case for being “counted” in several different sectors. Companies within the same sector tend to have relatively high correlations in their rate of revenue and earnings growth, stock price performance, and earnings forecasts – especially over short- and medium-term time periods.
A diversified stock portfolio should hold stocks across most, if not all, sectors. Market weightings of sectors can be found by looking at the composition of a broad index like the S&P 500.
I ran my own portfolio through a sector analysis and confirmed that I am still heavily weighted in banking stocks. As you can see I dod have a good cross section represented but the weighting is very skewed.
My goal will be to have no more that 10% of my portfolio weighted to any one sector at a given time. This will allow for proper diversification and risk reduction. In addition, I will focus on finding the strongest stocks in each sector that of course have a track record of increasing dividends. Over time this will allow for a strong and well-performing portfolio.
One thing I think you should keep in mind is that the Financial Services make up about 20% of the S&P 500. While certainly the S&P isn’t the end all be all of indexes, it does give a good cross section of the economy and a guide to allocation since it is a weighted average.
The second biggest allocation on the S%P is Healthcare at 13.4%, so it looks like that is your biggest weakness, and with Pfizer currently returning over 6%, it seems like right up your alley.
Mark @ TheLocoMono
What’s the difference between diversified financials and banking?
Quick question – what did you use to run the sector analysis of your portfolio and produce that great graph? Is there some automated tool that I can use (I’m in the UK with mostly UK stocks)
I use Quicken 2007 for Mac for sector allocation analysis. It allows me to set specific security types of my own choosing and sort by those types. I can then sort stocks into various sector types and determine if my portfolio is too highly weighted one way or the other in each sector type. If you need percentages for each sector, you can export the table of data to a spreadsheet, add a column for percentage calculation for each sector or security and see the results easily. It take me only about 5-10 minutes to do the process using that software.
Tonight, I downloaded Quicken 2010 for PC and it seems that I can do no such thing. I would like to know if the capability is there or not.