Jun 9, 2008: A crucial step in creating long-term wealth is to have a diversified portfolio that would behave reasonably well under various market conditions. Many experienced investors spice up their portfolio with few sector funds which have a potential to fetch above average returns.
Then why on earth would we like to invest in them?
Often it has been observed that a particular industry had led a market upswing with equities in that specific group doing exceedingly well than the market average. Therein exists a window of golden prospect to enhance the returns of a diversified portfolio. To make good of such an opportunity, sector investors need to:
- Invest in the right sector at the right time
- Be committed to doing research on the sectors
- Stay informed about the economic climate in the specific industries
- Diligently rotate their investments among various sectors judiciously
- Have high tolerance for risk
To help us develop a simple strategy for sector investing, here is a repetitive economic pattern. Figure 1 depicts a typical economic cycle. It highlights the stages at which different industries tend to beat the market average. This figure is based on past data and does not convey any current or future economic outlook.
Figure 1: A Typical Economic Cycle for Sectors
Do you invest in sector based mutual funds? Which ones have worked for you? Please feel free to share your sector based investing experience with us.
Image Source(s): Personal Fidelity