4 Questions To Consider Before Investing In a Sector

4 Questions To Consider Before Investing In a SectorOnce you commit to the idea of putting your money to work for you, you’re faced with a vast array of investment options. You might consider becoming a passive investor and turning your funds into a money market type of account, crossing your fingers and hoping it grows. As a proactive investor, you’re more involved with the specific places your money will go. This might require a bit more homework on your part, but you will probably feel stronger about your final decision.

One investment option you might want to consider is with a sector. These are considered long-term investment opportunities with a lower risk than investing in a particular company. As you might have guessed, there are plenty of sectors to choose from. Before you invest, it will help to understand the basics of what it means to invest in a sector. Here are some of the questions you should discuss with your broker about sector investing.

What Is the Sector Investment Process?

Because of the popularity of sector investments, you’ll find that the vast majority of money management institutions have set up their own types of sector portfolios. These exchange-traded funds or ETFs will include a range of sector stocks that make up the general fund. For instance, a tech ETF might include stocks from Apple, Microsoft and Google.

As with any type of broker generated business, you’ll have to pay a nominal fee based on the size of your investment.

Can I Invest On My Own?

You can certainly make your own sector investment. If you’ve set up an account with a brokerage firm (you still need to go through them) that offers free trades, then you can dive right in. This puts you firmly in the driver’s seat. However, it also means you need to stay on top of those investments with daily monitoring. That same broker’s fee might be worth it when you can depend on the experience offered by those analysts.

Is a Sector Investment Risk Free?

There is no such thing as 100% risk free investments. Even the most reliable of stocks can run into the occasional mass sell-off that brings everyone down. Consider the oil and gas sector investment. In the past couple of months, there has been a major upheaval in the oil industry as the market is being flooded with cheap barrels of oil. That might be good news for consumers, but it has proven to be shaky for investors. This is why you should spread your investment dollars across several sectors. That way, you can ride out the storm when one industry takes a hit.

How Can I Find Out More About a Sector Beyond the News?

The moment you invest in the markets, you’ll want to expand your knowledge base. In other words, it might be time to start reading the finance section of the newspaper. Beyond that, you could also talk to anyone you know who works in a particular sector. A friend who is a nurse can provide insight about how the new healthcare laws are impacting the hospital. A real estate agent can provide a snapshot of the housing market. Any way you can supplement your understanding of a sector, you’ll be ahead of the game.

As mentioned above, investment in a sector — no matter how stable it might be — will include some level of risk. No matter how much you research a sector, the unforeseen is always lurking. The recommended course of action is not to panic. Most sectors have a way of evening out. Remember, this is a long-term type of investment.

About The Author

Anum Yoon is the founder and editor of Current on Currency. She loves all things personal finance, which is why you'll find her work all over the PF blogosphere. Catch her updates on Twitter @anumyoon!

3 Comments

  1. amber tree

    Being a index investor at the core, I decided to avoid the sector/geographical question by investing in the whole market. In the long turn, my return will be average, meaning that I beat 90pct of the people! great!

    I do believe in the sector investing. I do it very often. For now, It is only limited to my play portfolio. There, I have room for error and learning.

    Reply
  2. Alvin Wolff

    Great point about finding more information beyond news. So many of my peers think they are experts because they read up on Yahoo! Finance or CNBC. Little do they know that the real information is what is no published online.

    Keep up the great work!

    ~Alvin

    Reply
  3. Vanna Lindholm

    As a general rule, you shouldn’t invest in things you have no idea about.
    Ask yourself if you can see where any given company will be in 10 years. If you’re sure they will be around doing their thing, go for it. For some tech companies it is impossible to predict even their existence after 10 years.

    Reply

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