When you invest in stocks, or stock mutual funds, you want to consider spreading your portfolio across a variety of industries or areas of the economy. Diversifying across different industries can help protect your portfolio from downturns in stock prices in a specific industry or sector of the economy that is not in step with the overall direction of the market.
For example, your stock portfolio could lose value if it is heavily weighted in telecommunications stocks, and the prices of those stocks drop dramatically even though the overall market is rising. Because it's impossible to predict the economic, political, or market factors that may effect the fortunes of any one industry or sector of the economy over the short term, it's important to make sure that your portfolio is never narrowly concentrated.
Different types of stocks tend to perform well in different market conditions. Cyclical stocks, for instance, are those that have a tendency to rise in value in a strong economy and fall during an economic downturn. These include airlines, automobile, and travel and leisure stocks. In contrast, stocks in industries that provide necessities — sometimes called countercyclicals — such as food, gas, and electricity tend to remain more stable in value regardless of market conditions.
Don Kittell
