Industry sectors
One of the key investing principals that almost every professional stock investor heeds is the need to diversify a portfolio. This can be hard to do if your financial resources are limited. This is why most professionals will suggest a beginning investor start out with an index fund that mimics the market. These funds represent a basket of stocks so diversification is built in. And you do not have to watch your portfolio closely, it runs on automatic. This is why most retirement plans rely on index funds.
If you want to learn to trade though, and have the time and inclination to keep track of your stocks, I recommend buying stocks directly. This way you really begin to get a feel for the market, the bonus being you keep your dividends and avoid management fees. One of the most important things in building a portfolio, though, is to keep the concept of diversification front and center. The easiest way to do this initially is to purchase stocks across a range of industries. The reason for this is clear on almost any day in the market. For example, today the energy sector was down while real estate and utilities sectors were up. On any given day you generally find a couple sectors doing well, others lagging. Sectors also trend, technology has been doing well for years as we have all increasing relied on machines. Financials on the other hand have lagged for a few years as interest rates are low and new financial regulations came into play after the financial crisis. For the long term, having stocks in all industry sectors helps you even out your returns.
There are eleven sectors commonly used by the market. They are shown below:
Prepared by Motley Fool
When I began trading I made a point of trying to buy at least one stock from each sector as I built my portfolio. I began in communication services, then bought some healthcare, then technology, etc. Now, while I have at least 5% of my portfolio in every sector. I have slightly more stock in sectors I think will be strong the next ten years (like healthcare and financials) but less in ones that are currently expensive and have weak growth prospects (utilities). The proportions I hold in each sector changes as the the world changes, I never put all my eggs in one basket.
Market Today: It was another weak day, a muted start to September, but up again slightly. I was surprised that my best option trades were in a stock I don’t own yet, calls on BioNTech (BNTX). I am going to be put shares next week. Since I now trade as a level 5 option trader (too years to get here) I can write uncovered calls. I would never, ever sell an uncovered call unless I am positive I’ll be put. And I am, unless BNTX jumps up another 20% in the next week which it has never done. For most of my option trades I rely on things not moving more than 20%. This is why my strike prices for selling calls are at a value at least 20% greater than what I paid and I sell puts for strike prices generally 20% below where the stocks currently trade. It is statistically safe but a 20% correction could catch me out and force me to borrow (i.e. use margin - most trading firms will advance you cash, for a fee, based on the cash value of your portfolio). This is why cash reserves are important. I hate to have to use margin for anything. (Note: Trading companies give people too much leeway here - please do not use margin to trade. It’s a sucker move.)