Breaking Down an “Obvious” Rule of Investing

Invest in strong sectors. Avoid weak ones.

This seems obvious, yes? But too often, people invest in weak sectors and avoid strong ones. Here are some of the culprits behind this backward thinking:

• Bargain hunting. Strong sectors are expensive. Weak sectors are cheap. Unfortunately, when you invest in sectors where demand and other fundamentals are deteriorating, you often get what you pay for.

• Bottom fishing. Does it get any uglier than banking? But investors have been recently pouring into banking in the belief that bank stocks have bottomed and are gearing up for a nice climb up the charts. Even if they do start to climb, it will be a sucker’s rally. Weak sectors are afraid of heights.

• Buying yesterday’s news. High prices reflect a strong sector? Yes they do! until, that is, prices overreach and fall back to earth because the fundamentals of the market don’t support them. The housing market is a great example. At the top, prices were no longer based on affordability or equivalent rent rates. Look forward, not backward, when you choose a sector to invest in.

There are other reasons, too, why people make the mistake of investing in weak sectors. A sector may be popular, fashionable but not strong – like the dot-com sector. Or investors buy on rumors, not fundamentals. (That’s a dangerous game that can turn against you very easily.) And investors just pick up wrong information. (You can’t believe everything you hear and read.)

So, what seems like a simple rule isn’t so simple to follow, after all. But truly strong sectors can really help your portfolio grow. And truly weak ones can help kill it.

A final word of caution: If you’re not quite sure if a sector is strong or weak, let it go. It’s not worth the risk.

[Ed. Note: The best way to know which sectors are strong enough to be worth your time and money is to follow the guidance of an investing expert. ETR’s Investment Director Andrew Gordon can point you toward the super-strong oil and gas sector. ]