Investing Basics: Sectors
To continue with the series on Investing Basics, we are going to explore sectors. I want you to determine if sector investing is the right strategy for you.
What is a sector? A sector is a business grouping within a similar area of the economy. Investing a crypto currency is similar to investing in a sector. When it comes to stocks, today’s most common sectors include, financial, technology, health care, energy, utilities, real estate, consumer goods, and durable goods. For example, the financial sector includes money center banks, consumer finance companies, life and health insurance companies, savings and loans, investment banking, and brokerage firms. Because sectors are concentrated, they have potential to achieve greater levels of returns at greater risk versus the broad market. Because they focus on a particular sector, without the need to take on the risks involved in focusing on a single stock they can act as an alternative to a single stock and improve portfolio diversification. Exposure to such concentrated investments, however, may increase the overall risk of a portfolio. Take the tech-bubble of the early 2000s, or cryptocurrencies. Investors who thought this phenomena was a sure thing and loaded up on related investments, more than likely lost a considerable amount of money when the bubble burst. Sector investing is not for the casual or risk averse investor because of the potential to be exposed to the substantially greater loses than those experienced by the overall market. Keep in mind that sector investments are narrowly-focused investments that typically exhibit higher than average volatility than the market in general. Sector investments will fluctuate with current market conditions and may be worth more or less than the original cost upon liquidation.
Businesses, markets, and economies all move in cycles. Identifying which sectors of the market perform well at different points in the cycle can be very helpful to find stocks that may benefit from a particular sector being in favor. Learn to monitor these sector cycles and determine when they are rotating.
Every market operates in cycles and produces peaks and troughs as it grows and contracts. The expansion and contraction can be measured over different time frames, from weeks, months, or even years. The stock market cycles frequently proceed the broader economic cycles and can be a leading indicator for forecasting economic strength or weakness. Once a cycle is completed, it tends to repeat itself in a fairly predictable manner. Institutional money managers tend to be aware of these cycles and we can be too. Once we are able to recognize which phase we may currently be in, we can determine which sectors are likely to perform well. Below is a graph which displays which sectors perform well at the different phases of the market based on historical data. Generally, by the time these sectors are announced to the general public, via an investing website, or investing television-channels, it is too late. Remember, when big, institutional money moves, it tends to happen over weeks or even months, which can make it difficult to detect unless you are specifically looking for it.
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