This month at The Motley Fool, we're committing ourselves to getting back to basics, culminating on Sept. 25 with Worldwide Invest Better Day. So far, my Foolish colleagues have armed you with information from the worst investment advice we've received to our favorite investing books. In a previous article, we reviewed stock diversification, a key fundamental of investing. Today, we'll focus on health-care stocks.
An overview of the health-care sector
Composed of biopharmaceutical, medical equipment and technology, and health-care service companies, this sector is generally less sensitive to swings in the economy than other, more cyclical sectors such as tech and consumer discretionary. The health-care sector faces many challenges, though, including possible cuts to Medicare. But while the sector faces headwinds, it also offers ample opportunities for investors.
Trends and challenges facing the sector
One major growth driver for the sector is favorable demographics. People are living longer, and an aging population leads to increased spending on health care. As we wear out, coronary stents are implanted, pills are popped, and knees are replaced more frequently. Companies that may benefit include medical-device makers MAKO Surgical
Then there's pharma. Big pharmaceutical companies such as Pfizer and Novartis continually feel pressure from highly competitive generic-drug makers such as Teva Pharmaceuticals
Be aware that less-than-perfect drug-approval process outcomes can send health-care stock prices tumbling. Biotechs VIVUS
Watch for other health-care trends, including:
- Growth in emerging markets. As developing countries have become wealthier, diets are improving, and increased wealth may lead to increased health.
- Continued medical innovation that will include more technologies to address diseases.
- A trend still in its infancy -- personalized medicine, which takes into account an individual's genetic makeup.
- Potential cuts to the U.S. federal budget that currently target health care. Different players in the health-care system would feel Medicare cuts differently -- hospitals and managed-care facilities are probably more at risk than generic-drug makers are.
Get sector exposure the simple way
Roughly 14% of your overall stock portfolio should be allocated to health care, using the MSCI World Sector Weightings as a benchmark. But what if you don't have the time or desire to examine health-care stocks? Sector-specific exchange-traded funds, such as theHealth Care Select Sector SPDR ETF, are helpful when you're dabbling in a sector that's not your specialty.
Prescription for a vigorous portfolio
Making a bet the wrong way in the stock market could cost you. Instead, develop a diversified strategy for adding all sectors to your portfolio. That way you'll know, regardless of what happens in the market, that a portion of your portfolio will prevail.
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