Unlocking the power of strategic diversification across investing sectors: Maximizing returns and minimizing risks in your investment portfolio

A key aspect of our TSI investment philosophy is portfolio diversification across most if not all of the five main investing sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities).

That way, investors can avoid overloading their portfolios with stocks in one investing sector that are about to slump simply because of industry conditions or changes in investor fashion. At the same time, that diversification maintains your exposure to stocks and sectors ready to outperform.

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The key point to profiting from the five investing sectors is that investors should spread their investments out across most if not all of them. And at the same time, investors should also follow the other two cornerstones of our TSI investment philosophy as well—sticking mainly with well-established companies, and downplaying or staying out of stocks in the broker/media limelight.

Note that there are a number of difficulties with recommending a model portfolio for all investors. The main one is that each individual has different objectives, risk tolerances, and so on. For example, conservative or income-seeking investors may want to emphasize utilities and banks for their high and generally secure dividends. More aggressive investors might want to increase their portfolio weightings in resources or manufacturing sectors.

In this article we highlight, by means of a statistical analysis, the returns and risks of each of the main TSI investing sectors. We find that the data supports the TSI philosophy—it pays to spread your investments across the five main  sectors.

How the investing sectors performed

TSI identifies five main investing sectors; namely, Resources and Commodities, Manufacturing and Industry, Utilities, Finance, and Consumer Goods and Services.

Companies that operate under the Communication Services, Health Care, Consumer Discretionary, Information Technology, or Real Estate umbrellas are slotted into the five sectors corresponding to their main activity. For example, Communication Services are classified as Utilities, Information Technology as Manufacturing, and Health Care as either Consumer Goods or Manufacturing.

For our assessment of the performance and risks of each  sector over time, we used ETFs that correspond broadly to the five main TSI investing sectors, as well as the subsectors of Communication Services, Healthcare, Information Technology, Real Estate, and Consumer Discretionary. We used ETFs that invest globally for the analysis.

Information technology outperforms

It’s no surprise that Information Technology performed better than any of the other investing subsectors over the past decade. But Health Care, Industrials, and Consumer Discretionary also delivered attractive annual total returns (all including dividends).

At the other end of the scale were Utilities, Real Estate, and Resources  sectors. They still delivered reasonable returns, albeit lower than the top-performing segments.

Resources was also the most volatile sector, followed by Information Technology and Finance. Consumer Staples and Health Care were the most stable performers over the decade.

Year-by-year performance can have wide swings

But the average annual returns do not tell the whole story. There were periods when Resources performed significantly better than any other investing sector and there were periods when Technology was the worst-performing sector.

Apart from the consistently strong performance of the Information technology segment, Resources and Consumer Discretionary also had periods of exceptionally strong performance. On the other hand, Resources, Real Estate and Finance investing sectors had overall poor three-year runs.

Which investing sector will prevail in any year?

Research also indicates the number of times that each investing sector ended up in the top 3 sectors or bottom 3 based on the annual returns since 2009. (For this analysis we used U.S. investing sector performances.)

Resources (including Mining and Energy) was the most volatile investing sector, with five appearances among the top 3 sectors and 14 appearances in the bottom 3. Consumer Discretionary was the outstanding performer with 9 appearances in the top 3 and only one in the bottom 3.

Here are some examples of the wild swings in investing sector performances: the bottom ranking of the Energy investing sector in 2020 (decline of 33%), followed by a top-ranked 55% jump in 2021 and another 66% gain in 2022; and an equally wild swing came in the Information Technology investing segment, with a bottom ranking after a 28% drop in 2022, followed by a top-placed ranking and a 58% gain in 2023.

A key takeaway from the annual investing sector performance rankings is that the top and bottom performers changed, with few exceptions, every year. That means it’s impossible to consistently predict which investing sector will perform best or worst in any given year.

Meanwhile, maximum drawdown measures the top-to-bottom performance of a stock or index.

Resources and Communication Services investing sectors both delivered drawdowns of 40% or more over the past decade, while Consumer Staples and Health Care provided more stability.

Also of note is the 34% drawdown in the Information Technology investing sector (which took place between January and October 2022).

Finding the big winners

Irrespective of which investing sector performs best over any period, the top-performing companies may come from any sector. Investors who spread their investments over the whole universe have a better chance of netting the big gainers.

All of the investing sectors delivered stocks with significant gains. Among the Industrials, United Rentals gained 462% over the past five years; the Health Care investing group’s Eli Lilly added 509%; while Resources had the Australian mining and energy company Fortesque with a 296% gain. These were of course dwarfed by the 1,969% gain for Nvidia.

Hunting for dividend income

Not all sectors deliver regular and growing dividends. That’s important for investors, because if you stick with top-quality high dividend yield stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains.

Stable and growing dividends are found in the Consumer Goods and Utilities investing sectors, while the Resources and Finance investing sectors offer still-attractive but less stable dividends.

Which sectors do you invest in? Leave a comment and let us know.