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what are the advantages of paying attention to sectors and industries?

Friday, Aug 9 2019 11:07AM

Examining sectors and industries allows you to compare one business to its closest competitors. You may think a certain stock is a good purchase, but until you research its rivals, you won't know for sure.

Looking at sectors and industries also helps you become familiar with how businesses interact with one another. For example, if you believe that energy prices are going to decline, you might find transportation stocks appealing, because you believe one of the biggest cost inputs — gasoline and jet fuel — is about to plummet. When combined with disciplined, long-term, tax-efficient, low-turnover, highly passive investing, this knowledge can be a ticket to building wealth.

It's also now possible to invest in an entire sector or industry with one purchase. Rather than buy shares of every company in a given industry or sector, you can get exposure to all of them in a single investment. With exchange traded funds (ETFs), smaller investors can often buy a diversified basket of an entire grouping, often with little to no commission and expense ratios that are typically less than 0.50% to 1.00%. These ETFs are similar to mutual funds but trade like stocks, and allow an investor to get exposure to a wide range of investments in a sector or industry without needing to research individual stocks.

Many financial advisers recommend that investors try to maintain a portfolio that offers good exposure to all of these industries and sectors.

For now, let's dive into the sector and industry breakdown of the U.S. stock market as a whole. I'm going to use the S&P 500 index as a proxy for the stock market. As of the most recent stock market close on December 7th, 2018, the total value of all stocks in the S&P 500 index came to $23.28 trillion.

Communication Services Sector of the S&P 500
From telephone access to high-speed internet, the communication services sector of the economy keeps us all connected. At present, the communication services sector is made up of five industries:

Diversified Telecommunication Services
Wireless Telecommunication Services
Interactive Media & Services
As of January 25, 2019, the total value of all communication services stocks in the United States came to $4.42 trillion, or 10.33% of the market. The communications industry includes stocks such as AT&T and Verizon.

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