Modern portfolio theory says that as you age, you should be reducing the amount of money you have in stocks, and growing the amount of money you put in safer investment vehicles such as bonds and, CDs (not the ones by Van Halen). Well I for one find bonds and CDs rather boring (unless they're over 5%), so the rest of this article will be focused on stocks, and bonds for another day.
Within your stock portfolio, there are several ways to go about investing. Greg likes to invest in high dividend paying stocks. I am becoming interested in sector investing. At any given time you can look at the S&P 500 index and determine what percent each sector contributes to the overall total. Depending on various business cycles, political or economic events and even the weather, some sectors grow, and others diminish. According to Argus research Sector Watch from August 2018, the largest sector of the S&P 500 is Technology (26.2%) followed by Healthcare(14.6%), Financial Services (13.9%%), and then Consumer Discretionary (12.8%). If you invest in a S&P Index fund, you'll get these allocations automatically because they are the makeup of the index itself.
What about performance? Is it directly correlated with the market cap weighting of the sectors? According to the very same Argus report, Technology was the leader with 17.6% return year to date, so "YES" for technology. As much as we love to speak about the benefits of a basic S&P 500 index fund, you only would have made 7.5%. this year investing in it. The next winning sector year to date was Consumer Discretionary with a 16.3% return. Remember that Consumer Discretionary is only 12.8% of the S&P 500, Healthcare was #2 by market cap and made only 10.9% return. So the market capitalization and the sector performance don't always match in their rankings.
Sector investing allows one to review the various sectors by market cap and YTD performance to make judgments about which ones will continue to grow at the same or faster rate, and which ones should be reduced because they are not performing well. Consumer Staples and Telecommunications actually lost money this year. Had you had a large percentage of your portfolio in those, you might not be so happy this year.
So what do you do with all this information? There are thousands of research reports out there written by "experts" that provide guidance on which sectors we should bulk up on, which sectors should match the S&P 500, and which sectors should be reduced or sold off completely. The tough part is do your homework and choose sectors that make sense to you based on your interpretation of the economic indicators and analyst ratings. I'm considering setting up a small account for just sector investing. I would start by purchasing 10 Sector ETFs and then changing their market cap weighting monthly as needed. As long as transaction fees don't eat up my profits, this might be one way to go. One could also just choose a "best of breed" stocks as Jim Cramer calls them to be a proxy for each sector. You are taking on more risk in doing this, however you also could have larger rewards. You could also just take a look at your portfolio as a whole and determine if you're lacking in a particular sector. I for example have about 70% in Equities, however I am under allocated in technology. If I wanted to either match or exceed the S&P 500's natural technology allocation, I could use this a reason to add a particular stock or ETF to my portfolio to compensate.