Balance your portfolio across 5 sectors

It's best to diversify your portfolio across all five sectors of the economy: finance, utilities, consumer, manufacturing and resources. Remember, though, there's danger in loading up on stocks in sectors that we expect to beat the market. That's because investors often bid up the prices of such stocks, making them vulnerable in market setbacks.

When you buy stocks in sectors and sub-sectors of the market, keep your goals in mind. If you're a conservative, income-seeking investor, focus on utilities, financial and consumer stocks. If you're aggressive, buy more manufacturing and resource stocks.

As a general rule, we advise you to keep at least 10 per cent-but no more than 30 per cent-in each of the five main economic sectors. Remember, too, that within any given sector or sub-sector, individual stocks will perform differently from one another.

Here's our outlook for the next six to twelve months for the five main sectors and their sub-sectors. Our long-run outlooks can differ from our short-run outlooks.

Financial stocks

We still expect the bank stocks to beat the market. Interest rates are moving up, they're expanding, cutting costs and pay high, growing, dividends. We now expect mutual funds to match as they offset competition by the banks with exchange-traded funds. We still expect insurers to beat due to rising interest rates and fast growth abroad, particularly in Asia.

Utilities stocks

Utilities mostly pay high and rising dividends. We still expect gas and electricity utilities to match as they compete against renewables. We now expect pipelines to match due to vociferous opposition. We still expect the telephone oligopoly to beat.

Manufacturing stocks

We still expect building materials stocks to match as construction and renovation proceed. We still expect chemical stocks to match as they merge and cut costs. We still expect fabricating stocks and engineering stocks to outperform as North American governments invest in infrastructure. We still expect steel-related stocks to lag due to low prices as China dumps excess output. We still expect technology stocks to outperform as firms invest to cut costs. We now expect transportation stocks to match. Protectionism will reduce the movement of goods internationally, but the North American economy is growing.

Consumer stocks

We still expect traditional communications stocks to lag, but not those that serve online advertisers. We now expect food, beverage and tobacco stocks to match as more investors seek dividends and safety. We still expect Canada's drugstores and small healthcare stocks to lag, due to government regulations, lower drug prices and generic drugs. We still expect surviving merchandisers to match as competitors fail. But online sales by say, Amazon, are a threat.

Resources stocks

We now expect gold stocks to match as inflation is low but they rationalize operations. We now expect oil and gas stocks to match as US shale drillers profit from higher prices at Canada's expense. We now expect mining stocks to outperform. Stronger international trade is positive for demand and prices. We now expect forestry stocks to match. US duties are partly offset by brisk construction and rebuilding in Houston and the Florida keys after the hurricanes.

Sector overview

It's best to diversify across the five main sectors of the economy: finance, utilities, consumer products and services, manufacturing and resources. Each of these broad sectors is made up of sub-sectors that often have different outlooks.

Remember, though, there's danger in loading up on stocks in sectors that we expect to beat the market. That's because investors often bid up the prices of such stocks, making them vulnerable in market setbacks. Stocks in sectors that we expect to underperform, by contrast, often trade at bargain levels. Besides, predictions-including ours-are susceptible to errors. So make sure you own some stocks even in sectors that we expect to lag the market.

This is an edited version of an article that was originally published for subscribers in the December 1, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846