This month at The Motley Fool, we're committing ourselves to getting back to basics, culminating on September 25 with Worldwide Invest Better Day. So far, my Foolish colleagues have armed you with information like the worst investment advice we've received and our favorite investing books. In a previous article, we reviewed stock diversification, a key fundamental of investing. We're looking at stock sectors one by one, focusing today on financial services.
Overview of the financial services sector
Sensitive to the health of the economy and changes in interest rates, the sector includes companies in banking, consumer finance, capital markets, and insurance. The financial services industry grew quickly in the early 2000s because of rising home values, loose lending standards, the invention of new products, and the increased use of debt.
By 2008, the environment started to change, and falling asset values and rising loan losses led to a worldwide credit crunch, meaning a sudden reduction in the availability of loans and an increase in the cost to obtain loans. The sector is currently experiencing the impacts of the credit crunch, among them increased financial reform and regulation, a reduced use of debt, and lower profitability for the industry.
So how will these changes impact financial services companies?
Industry dynamics, major players
Megabank Bank of America
Meanwhile, the fallout hasn't been as systemic for regional banks like US Bancorp
Industry trends including enthusiasm for new products like exchange-traded funds (ETFs) should help drive revenues for companies with exposure to capital markets. With $3.5 trillion in assets under management, the world's largest asset manager BlackRock
Consumer finance companies include payment processors Visa
Get sector exposure the simple way
Many investors shy away from financial services stocks, but owning the sector is part of being a well-diversified investor. Don't have the time or desire to dig into financial services stocks? Consider a sector specific exchange-traded fund (ETF). Sector specific ETFs like the Financial Select Sector SPDR ETF are helpful when you're dabbling in a sector that's not your cup of tea. Roughly 14% of your overall stock portfolio should be allocated to financials, using the MSCI World Sector Weightings as a benchmark.
Build a more cents-able 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, a portion of your portfolio will triumph.
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Join us for more basic investing information on our microsite for Worldwide Invest Better Day. On the site, we've posted tons of great articles aimed at helping you do just that.
Fool contributor Nicole Seghetti owns shares of Bank of America. Nicole welcomes you to follow her on Twitter @NicoleSeghetti. The Motley Fool owns shares of Bank of America. Motley Fool newsletter services have recommended buying shares of Visa and BlackRock. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.