What industries should you invest in?
That is literally the million dollar question. Professional investors dedicate their careers to it. The successful ones can make millions, billions even. Figuring out, year after year, where the money will move… it's a big deal.
Of course, that doesn't mean it's hopeless to try and identify strong investment industries for your own portfolio. But it does mean that you should take any advice on this subject with a grain of salt. Here are three tips you should consider when figuring out the best industries to invest in.
Note to Readers - All advice in this article is to be taken as purely educational and is not to be interpreted as personal investment advice. All specific industries are given for demonstration purposes ONLY. For actionable recommendations on your own portfolio, see a credentialed financial adviser.
First: Keep a Consistent Strategy
One of the biggest mistakes that retail investors (like you and me) make is active portfolio management. We try to play the market, timing stocks and moving money around to chase the latest hot sector. This usually results in losses, and the investors who don't lose money generally make less than they would have with a little bit of patience.
There's nothing wrong with setting aside a pool of money for speculation, but the bulk of your portfolio should be built around a strategy. You invest around goals; balance growth against your capacity to rebuild after losses; maintain a healthy diversity of assets and industries; and plan to hold most investments for a period of years.
We wrote about this at length in our article about applying the lessons of Warren Buffet to your own portfolio. Smart investors focus on long-term growth and buy securities for the real value of an underlying asset. Don't ask what the market will do with this stock next month, ask whether the company selling it has a sound business model.
And don't disrupt that in search of the next hot thing.
When looking for the best industries to invest in, start by focusing on your strategy. Don't change your approach to investing to chase something that looks hot. There's nothing wrong with spending some speculation money on that kind of investment, but otherwise pick industries that complement your portfolio.
Second: Invest in Sector-Indexed Funds
When you want to invest in a specific industry, the best way to do so is through what's known as a "sector fund."
Sector funds are a form of index fund, a portfolio of assets built so that its total growth mirrors a third party benchmark. For example an S&P 500 index fund would be built out of a bundle of assets so that the portfolio overall tracks the growth and losses of the S&P 500. (In this case, typically by simply buying shares of the companies that make up the S&P 500 itself.) As an investor you buy shares in these funds, owning a piece of its overall performance in much the same way as you would buy equities.
Many funds are indexed to specific industries. These are called sector funds. These products are built to track the performance of specific industries. For example, a financial sector fund might try to track the gains and losses of the banking and lending industry overall, while a technology sector fund would try to reflect the performance of tech companies.
This is the best way to expose your portfolio to an entire industry. Investing in specific stocks helps you catch some of the gains from a given sector, but the returns of an equity will generally have more to do with how that specific company performs than the market at large. If you want to invest in an industry, a sector fund is the best way to do it.
Sector funds require more analysis than typical index funds because there's no unambiguous benchmark for the fund to track. In the case of something like the S&P 500 or the Dow Jones Industrial Average, the fund can use an existing number to judge how accurately it has performed. There is no universal benchmark that measures any specific industrial sector, though, so these funds are put together based on the given fund managers' best judgment. As a result you should make sure to study the past performance of any given fund before investing.
Third: Choose an Industry
We saved picking the actual best industry to invest in for last. Why is that?
It is because we absolutely cannot overemphasize the importance of fundamentals. The best advice we can give you as an investor is to manage your money for the long run. A well-diversified portfolio built with an eye toward underlying asset value over a period of years will serve you far better than one that tries to maximize stock tips. We emphasize that because investors often overlook these fundamentals. They're far less exciting than capturing quick gains from big buys, but the boring stuff works.
That doesn't mean that picking your specific investments is irrelevant. Far from it. Managing your specific purchases wisely still matters quite a bit. Based on what you want your portfolio to do, some sectors will suit you better than others. Here are some examples you can consider while building your own investments.
• Growth Investors: Technology
There's no other way to say it, technology is the growth sector right now. The biggest gains often cluster around high-tech products, and firms like Apple (AAPL) - Get Apple Inc. (AAPL) Report , Google (GOOGL) - Get Alphabet Inc. Class A Report and Facebook (FB) - Get Facebook, Inc. Class A Report have become world-striding firms with more cash than many sovereign governments. As a result these firms tend to post fast gains, which can be very good for growth-oriented portfolios.
Be careful, though. Growth comes with risk. Already the market has begun to show signs of trouble ahead for this sector as the unicorns of the digital startup space have struggled to convert their enormous market success into actual profits. The firms of the 2000s such as Amazon (AMZN) - Get Amazon.com, Inc. Report , Facebook and Google have made more money than most companies in human history. The firms of the more recent decade, such as Uber (UBER) - Get Uber Technologies, Inc. Report , WeWork and Bird have… not.
• Stability Investors: Consumer Staples
Consumer staples are the basics like food, clothing, hygiene and other products we all use on a day-to-day basis.
This sector lives by the age-old rule that when it comes to money, boring is good. An exciting accountant is one of life's big mistakes, right up there with playing "guess the diagnosis" and fun little brake pedal surprises. Consumer staples deliver on that count. The underlying demand for these products doesn't tend to change much with financial conditions, so this is historically one of the most stable sectors you can invest in. It won't deliver explosive growth, but it's unlikely to surprise you either.
• Economy Investors: Consumer Discretionary
Many investors build their portfolio around the performance of the stock market overall. To do this, they invest heavily in market-index stocks that track indices like the S&P 500 and the Dow Jones Industrial Average.
You can extend this strategy to investing in the economy overall, trying to index your portfolio to the general growth of the U.S. economy. The consumer discretionary sector is a good investment choice for investors who would like to do this. Like consumer staples, this industry represents consumer spending, but unlike its counterpart, it focuses on the products that people don't need. This sector index will try to capture spending on products such as entertainment, luxury goods, consumer electronics and other high-demand, low-need goods.
It tends to track well with the overall performance of the U.S. economy, reflecting the confidence and spending power of consumers at large.
• Low-Risk Investors: Health Care
The health care sector generally reflects companies engaged in the delivery of health care, such as those that produce medicine and medical devices and privately traded medical services providers.
This tends to be a highly stable sector because the demand for health care has no relationship to the economy at large. People need health care at a steady, stable rate that will only grow as the population at large continues to grow. While public health initiatives can potentially influence that demand and while health care payment reforms might affect some degree of revenue, ultimately this is an industry that will always have to deliver a stable rate of high-quality products and services.
With the baby boomers aging into retirement, that will grow particularly large in the coming years. This is not an industry for big gains, but it is one for someone who wants to minimize risk..