This month at The Motley Fool, we're taking an all-hands-on-deck approach to getting back to basics, culminating on September 25 with Worldwide Invest Better Day. With this in mind, my Foolish colleagues and I are opening the floodgates with vital information to help you invest better. In a previous article, we reviewed stock diversification, a key fundamental of investing. We're taking a look at market sectors one by one, focusing today on Consumer Discretionary.
The ins and outs of the sector
The Discretionary sector begs notice since consumer spending represents over two-thirds of U.S. GDP. Discretionary products constitute big-ticket items like cars, jewelry, travel, and other goods that we purchase infrequently. We're more apt to buy these when we feel richer, typically during robust economic times. Using the MSCI World Sector Weightings as a benchmark, roughly 10% of your overall stock portfolio should be allocated to Consumer Discretionary.
How the sector performs
Discretionary stocks enjoy more upside during a vigorous economy when investors place a premium on these companies. That being said, Discretionary stocks typically outperform the overall stock market when the economy is purring along. For example, from March 2009 to present, the Discretionary sector returned 208% versus 128% for the market. Typically, during a weak economy, the sector underperforms, and, over long spans of time, the sector usually outperforms. During the past decade, Discretionary stocks returned 111% versus 96% for the S&P 500.
Challenges and trends facing the sector
Affluent consumers spend heavily on luxury goods and services, which are viewed as status symbols. The top 20% of households account for up to 60% of consumer spending. Offering apparel like clothing, handbags, and accessories, luxury retailer Michael Kors
Brand power significantly distinguishes one Consumer Discretionary company from another. Even though Ford
As disposable incomes increase, more luxury goods and services are purchased in geographies unthought-of in the past. In developing nations, middle-class consumer spending is expected to grow to $20 trillion annually by 2020, up from $7 trillion in 2010. To capitalize on this, Wynn Resorts
Of course, the elephant in the retailer's room is e-commerce. Today roughly 5% of total retail sales are online; this is expected to skyrocket. Amazon.com
An easy way to own the sector
If you're clueless when it comes to Consumer Discretionary stocks, consider exchange-traded funds (ETFs). ETFs mimic the performance of an index, like the S&P 500, or provide specific exposure to certain sectors. Sector specific ETFs like Consumer Discretionary Select Sector SPDR ETF are helpful when you lack information to hypothesize an investing thesis.
You: A better stock investor
If you bet wrong in the stock market, it could cost you dearly. Instead, develop a diversified strategy for adding all sectors to your portfolio. That way, regardless of what happens in the market, you'll know a portion of your portfolio will prevail.
Join us for more investing basics on our microsite for Worldwide Invest Better Day. On the site, we've posted a plethora of articles aimed at helping you become an even more excellent investor.