One of the most robust methods of classifying the different kinds of unsystemic risks within an investment portfolio is to have a robust system of determining exactly what kind of business the companies being invested in pursue, and then creating weighted positions across the various industry classes based on a desired level of risk exposure. While this might sound like a somewhat daunting task, don’t worry, because there is already a system in place that allows us to look at the different kinds of industries under which companies operate. By using the Global Industry Classification Standard (GICS) developed by S&P and Morgan Stanley, we can easily classify discrete business types in accordance to their unsystemic risks.
The GICS generally breaks down industry types into 10 sectors, and then continues to include over 147 different possibilities of sub-industries that a company can be categorized under. While such a system is overly precise for a personal investor, we can still easily look at the main categories and industry groups to determine the kinds of sectors that are out there to invest in, and begin our analysis. Some simple industry sectors and sub-groupings are listed as follows:
Using these sectors as indicators of where it is that the general boundaries of unsystemic risk can be drawn, we can start to look at how it is that they can be combined into a single portfolio that minimizes risk, while maintaining exposure to the variety of opportunities that each of these sectors presents. Looking through this list, we can seeing how it is that they each have their own aspects of cyclicality, and stability. These are the traits that we can then use within each of these categories to see which companies we specifically want to choose for our portfolio.
For example, within the health care sector, the provision of health care services will generally be a very stable industry because of the fairly constant demand for the service. This is contrasted by the extreme volatility of the pharmaceutical industry, which is tied entirely to ability of a company to research a safe and effective product that can be approved and moved into mainstream acceptance.
