Topic: How To Invest

How to Diversify Within the Five Economic Sectors

Within the five economic sectors, should you also spread out funds over some percentage of value, growth, and small-company stocks?

We talk frequently about the five economic sectors of investing (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities). But, we often get asked to dive deeper. What next?

Well, if you take account of your own financial and personal circumstances and temperament, and if you invest as we advise (diversifying across most if not all of the five main economic sectors, while confining your investments mainly to well-established companies), you will almost automatically buy some growth stocks and some value stocks; you will also near automatically buy some small-company stocks and some big-company stocks.

However, the five economic-sector diversification and overall investment quality of your portfolio are far more important than the relative amounts you invest in value, growth and small stocks.

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In any event, it’s impossible to come up with a one-size-fits-all answer when talking about the best balance among value stocks, more aggressive small stocks and growth stocks (some of which can fall into more than one category). The right answer for you depends on your investment objectives and financial circumstances. It also depends on the market outlook, and on where the best deals are available.

What types of companies should you invest in?

We feel most investors should hold the bulk of their investment portfolios in securities from well-established companies. All these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above-average growth prospects, compared to alternative investments.

For stock-market investors, this means holding a total of 10 to 20 mainly well-established, dividend-paying stocks, chosen mainly from our Average or higher Ratings and spreading their holdings out across most if not all of the five main economic sectors.

More aggressive investors may want to hold above-average proportions of their portfolios in Manufacturing or Resources stocks, while conservative investors may want to stress the Utility and Finance sectors.

We can be wrong on any of our stock or fund recommendations, of course. When we’re wrong on a speculative stock, losses are likely to be larger than with a well-established company.

What percentage of your portfolio should be held in conservative or aggressive investments?

The percentage of your portfolio that you should hold in conservative or aggressive investments depends on both your financial and personal circumstances. One key financial consideration is how soon you need to depend on your investments for income. If you only plan to begin dipping into your portfolio for income many years in the future, you can afford to take some risk in aggressive funds or stocks. But, depending on your temperament, you may prefer to stick with more conservative choices.

Our Income Portfolios provide a top selection of investments for very conservative investors and those who need regular income. Stocks on our Income Portfolios tend to be more stable than those in our other portfolios. The Income Portfolios do include a number of securities that also appear on our Conservative Growth Portfolio. That’s because they provide a high level of current income — but also have good growth prospects.

Investors who are nearing retirement often focus on stocks with high current yields. But, since your retirement could last 10 to 20 years or more, you also need stocks with rising dividends. Their yields (based on your cost) can rise to a worthwhile level over a period of years. But as dividends rise, stock prices will rise as well, so these stocks can provide a capital-gains bonus. For our Conservative Growth Portfolios, we look for stocks with rising dividends.

Our Aggressive Growth Portfolio selections tend to be more highly leveraged and more volatile than our Conservative Portfolio recommendations, and they can give you bigger gains and bigger losses. This may be due to financial leverage, or to the risk and potential growth in the industry or the company, itself.

Keep in mind that these or any aggressive investments should make up no more than, say, a third of most investor portfolios.

Why invest in the five economic sectors?

You should aim to invest initially in a minimum of four or five stocks—one from each of most, if not all, of the five main economic sectors (Resources & Commodities, Finance, Manufacturing & Industry, Utilities and Consumer).

You can buy them one at a time or over a period of months (or even years), rather than all at once. After that, you can gradually add new names to your portfolio as funds become available, taking care to spread your holdings out as we recommend.

successful investment is one that provides long-term gains for its investors. Profitability will mean different things to many investors. One key to making a successful investment is you need to disregard or at least downplay investment marketing messages.

This is especially true with new investment innovations. Investors need to be vigilant when looking at different types of investments because investment firms work hard on their marketing. They do this because it can attract customers and spur sales. But investment marketing can do damage when it makes an inherently risky investment look safe.

When it comes down to it, the four keys to investing successfully are:

  1. Don’t depend on luck to make money for you or to prevent losses.
  2. Be skeptical of the claims and recommendations of brokers, promoters or anybody else with a vested interest in a particular investment.
  3. Don’t do anything stupid.
  4. Win by not losing.

Successful investors try to arrange their portfolios so that they more-or-less automatically tap into the profit and long-term growth that inevitably comes to well-established companies.

All in all, to be profitable in any market, use TSI Network’s three-part Successful Investor philosophy:

  1. Invest mainly in well-established companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.

Do you agree, or do you use another strategy? I’d love to hear what’s working for you.

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