Which sectors of the economy will do well in 2012? No one knows for sure but there are a few sectors that look better than others, especially if the economy continues to be weak and stocks continue to struggle.
The Easiest Part of the Bull Market is Behind Us
One need not be an economist or stock analyst to be confident in guessing the economic and market outlook for 2012. As we begin a new year, the economy may be growing but it is weak and certainly not stable. Not even the most optimistic US economist projects the unemployment picture to improve significantly, the do-nothing US Congress will surely continue to hold the economy hostage and world economies will not improve any time soon.
With that said, it appears the worst of economic conditions may be behind us (for now) but the easy gains in the stock market, such as the large bounce that began in 2009 and extended into early 2011, has lost its steam. This sets the stage for an investor to spread risk through the classic and simple strategy of diversification.
Time to Diversify With Sectors
Any investor can diversify by simply making sure they have exposure to different asset classes (stocks, bonds, cash) and to different mutual fund categories within those asset classes. However, a few extra steps to build a portfolio of mutual funds can be taken to reduce market risk by adding small amounts of specific sector funds. The best way to gain exposure to these sectors is through purchasing Index Funds, ETFs or specialty funds that are actively-managed.
Which Sectors Are Good for 2012?
Many investors like to use sector funds in a defensive way. For example, think of a sport, such as football, where you have an offense, which is trying to score points, and a defense, which is trying to prevent the opposition from scoring. With investing, a defensive strategy is to find areas that may do better than others--to minimize or protect from losses--in a given economic environment.
If an investor believes the next year will either be one of weak growth or recession-like conditions (high levels of unemployment, negative consumer sentiment, anemic corporate profits), there are certain defensive sectors that may work well:
Health: No matter which direction the economy is going, people still need to buy their medicine and go to the doctor; people still get hurt and still need to get screened for terminal diseases.
Utilities: Similar to health, people still need their phones, gas and electricity.
Consumer Staples: This includes the basic things that people need for daily living, such as food, beverages and household items.
Some investors may want to stick their necks out and take additional risk in 2012. If so, they may consider sectors that could do well in economic recovery, such as Real Estate, Financials, Consumer Discretionary and/or Technology.
In the interest of diversification and balancing risk, the total portion of exposure to sector funds should not be more than 15% of the total portfolio. The levels of asset allocation will depend upon risk tolerance and investment objective (time horizon, reason for investing). In other words, avoid market timing but make diversification your priority.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.