Whether you're beginning your journey in the investing world, or you've been in the investing game for a while now, the words 'portfolio diversification' should be a well-known concept to you, as it's an essential part of risk management.

One of the best ways to diversify your investment portfolios today is to invest in a range of strong, stable, and protective sectors, offering good potential returns, like healthcare stocks. The healthcare sector has been the center of attention since the world was hit by the COVID-19 at the beginning of 2020, as many pharmaceutical and bio-pharmaceutical companies were in the race to find a vaccine.

So, why should you invest in healthcare stocks, and how do they help you better diversify your portfolio? Before we dive in, here is a list of the top healthcare stocks to watch now, so then you can consider the most promising ones and include them in your portfolio, if they fit your investing or trading strategy.

What is diversification?

The concept of portfolio diversification has been widely spread by Harry Markowitz in his Modern Portfolio Theory (MPT). A diversified portfolio offers investors a less volatile portfolio, allowing them to mitigate risk and maximize their returns by allocating funds in different financial vehicles, assets, industries, countries, currencies, and other categories. Of course, not all risks can be minimized with diversification. While unsystematic risk can be mitigated, systematic or market risk is unavoidable.

How to best diversify your portfolio

One way to diversify your portfolio is to invest in uncorrelated assets, meaning that your stocks won't move in the same direction. Here you can use sector and industry diversification. You can also add geographic diversification, investing in stocks that don't face the same geographic challenges and growth prospects. In addition, you can also invest in different currencies. Another level of diversification is to choose your stocks depending on their market capitalization - large-cap, mid-cap, small-cap, and penny stocks, or your investment strategies and objectives - value vs growth stocks and short-term vs long-term investments.

Why should you diversify your portfolio with healthcare stocks?

Investing in the healthcare sector is usually considered to be investing in a defensive sector, which means that it's a strong sector, bringing consistent returns regardless of the global economy or how the stock market is doing. Not all healthcare stocks are equal, and you should focus on companies that can benefit from an aging population, from the advances in the use of technology in remote monitoring or surgery robotics, as well as companies dealing with Covid-19 vaccines and other treatment advances.

The healthcare sector also includes companies that can be broken down into different categories. You can find service-oriented companies, as well as manufacturing, selling, and production companies for instance. Hospitals, nursing homes, clinics, medical insurance providers, pharmacies and other sellers of healthcare products, surgical robots' developers, as well as researchers, are all kinds of healthcare industry sectors.

All of this means that this industry is huge, with several sub-sectors to invest in, so there are different ways you can get involved in it. Investing in the healthcare sector means that you will benefit from an important industry that is widely represented in major stock indexes. For instance, it is the second-largest industry group of one of the most popular American stock indexes - the S&P 500 - representing more than 10% of the Nasdaq Composite, and around 5 stocks in the 30 components of the Dow Jones are healthcare-related.