In this market, it pays to play sectors
In this wild and unpredictable market, the forest for the trees approach of taking investments in sectors rather than individual stocks is certainly showing its strength. The up and down markets of today can be ridden out with this approach that not only have logical appeal, but plenty of evidence to back it up. Quite frankly, individual investors are horrible at picking individual stocks and would instead get the same return from investing in the sector rather than the company.
Investors should shift their goals from individual stock picking to that of sector investing. In the up and down today, individual stocks pose a huge risk of loss due to less than positive earnings reports. Rather than let a portfolio be dictated by the movements of an individual stock, a more fundamental approach of buying the group rather than the single company proves to be a better investment.
Forest for the trees is all about maintaining the same returns without excess risk. This approach is often used to compare the results of mutual funds that stock pick to the returns of sector picking. In almost every case, investing in sectors rather than individual stocks produces the same return with greater diversification.
Sectors as a whole move together in price because of the comparative analysis traders use to make decisions. When Yahoo posts a good quarter, Google rises in value not because it did well but because the whole sector is seen as a value play. This kind of comparative analysis is what drives markets, especially from institutional investment.
For the rough times of today, play the sector, limit your risk and generate returns. When the market comes back to its glory days we can start to invest in individual companies but until then this market is just far to volatile for any individual long term investments.
May 30th, 2008 at 5:35 am
I completely agree with this approach. With all of the turbulance in the equity markets you’d be a fol not to notice he continued and teady rises in commodities prices. I think sometimes as investors we get too booged down in finding individual winners when instead if we take a step back we can often find more obvious trends happening, sucjh as the rise in commodities. I for one am lonf commodities Exchange Traded Funds!