Sector investing offers a way to benefit from the growth of specific sectors within an economy. Like any investing strategy, there are factors to keep in mind to increase your likelihood of success.
Here are the 3 things to remember as you navigate this approach.
1. There are different ways to practice sector investing
A popular way to do sector investing is to buy the stocks of different companies within certain sectors. However, this can be expensive since you’ll need a lot of capital to invest in individual stocks.
It would also require a bit of research since you’ll need to look into specific assets or companies. On top of that, you’ll also need to study the broader challenges and opportunities facing various sectors.
The good news is, there are other ways to increase your exposure to certain sectors without using as much capital or having to handpick individual options.
There are sector-focused pooled funds and exchange-traded funds (ETFs) that allow you to put money in your desired sectors with ease and at a relatively more affordable cost.
2. You'll need to monitor and analyze market data
Successful sector investing hinges on finding out which sectors are likely to do well throughout the time you plan to invest.
It’s ideal to read up on economic indicators and sector-specific news to get an idea of what may happen to entire sectors and the companies and assets within them.
Factors that can impact a sector’s health and growth potential include economic cycles (whether the economy is growing or contracting), regulatory changes, and technological advancements.
3. It can help you manage risks — when done right
Investing across different sectors is one way to diversify your portfolio to manage risks. While some sectors may suffer from unfavorable economic conditions or events, others may do well at the same time.
To maximize growth and address risks, sector investing is further narrowed down into specific approaches. Here are 2 methods to consider:
- Move your money around through sector rotation
Some sectors tend to move up or down depending on the phases of an economic cycle. Certain sectors may perform better when the economy is growing while others see growth even as the economy is slowing down.
Sector rotation is a practice that takes advantage of the observed relationship between sectors and economic cycles. It involves moving your investments from one sector to another as the cycle progresses.
Your success depends on timing your investments right. That’s why this practice may require advanced skills and an active approach, although making money isn’t guaranteed even with this strategy.
- Take a long-term view
If you’re a passive investor, you may want to consider investing in sectors that are likely to grow over the long term instead of shifting investments frequently.
It’s also ideal to spread your money across different asset types and sectors. This may protect your overall portfolio from the potential negative effects of economic conditions on your investments.
Remember to always keep your risk tolerance and goals in mind no matter which strategy you’ll follow.
