Why It Pays to Diversify Across Market Sectors

If there’s one thing history has taught investors, it’s that trying to pick the "hot sector" each year is a tough and often losing game. From 2010 through the beginning of 2025, no sector consistently stayed on top. Take Energy, for example: it was the best performer in 2016, 2021, and 2022. But there were five other years when it posted the worst returns. Technology tells a similar story. After leading the pack in 2023, it finished tenth out of twelve sectors just the year before.

There’s no reliable pattern. And that’s exactly why a diversified approach owning a broad mix of sectors makes so much sense.

Diversifying across sectors helps investors ride out the market’s ups and downs. Some sectors are cyclical, meaning they tend to do well when the economy is growing. Think consumer discretionary, industrials, and financials — the parts of the economy that thrive when people are spending and businesses are investing. Other sectors, like healthcare and utilities, are considered defensive. They often hold up better when the economy slows because people still need medical care, electricity, and water, no matter what’s happening in the broader economy.

Rather than trying to guess which sector will shine in any given year, it’s often smarter to build a portfolio that owns them all. That way, you’re always positioned to benefit from whichever part of the economy is doing well — without having to make a series of high-stakes bets.

In investing, as in life, balance and preparation usually win out over prediction.