If you want to prevent yourself from substantial losses, you have to have a diversified portfolio. This means in terms of industries and firms.
But how do you know which industries are the right one for you?
We will go through it here
In my last post, I said that most companies are affected by the economy, and those that are not, are called defensive stocks.
You might think “Hey, I can put my money on all the industries that contain those defensive stocks“ but no.
This won’t make your portfolio diversified enough.
Also it might prevent yourself from making a superior return on industries with better perspective.
Now, in which industry should you invest depending on the stage of the economy you are in?
Industries in relation to the economy stages:
Expansion: Consumer durables, banks, technology, and luxury items
Trough: Capital goods industries
Peak: Natural resource extraction and processing
Contraction: At the beginning of the contraction pharmaceuticals, food, and other necessities and in the end financial firms
Do not forget, don’t put all your eggs in one basket.
You should not believe that if you’re in a trough you should invest all your money in the capital goods industries.
It just means that it might be a good idea to put more weight on that industry.
Another thing to consider if you want to invest in a start-up industry or a mature one. In a star-up stage, you can expect extremely rapid growth but firms can also turn out to fail altogether. In the case of mature industries most often than not the growth will be no faster than the general economy. And be careful not to confuse the start-up industry with start-up companies.
For example, the vegan industry is in a start-up stage while the technology industry is in a mature stage
This does not mean that you can’t find start-up companies in the technology industry.
Finally, if you are into start-up companies do not forget to also consider:
Porter’s five forces
- The threat of entry: For example, a new cellphone company will have a hard time since big companies like Apple have a lot of brand equity. Other barriers might be a high initial capital investment or accessing distribution channels.
- The rivalry between existing competitors: If there are a lot of competitors well it’s harder to gain more market share and which also means low-profit margins
- Pressure from substitute products: Meaning you might have a lot of options for the same thing. For example, for thirst, you can drink water, soft drink, sports drinks etc…so all those industries are in competition.
- Bargaining power of buyers: We can think of a company that sells a pretty specialized material that only a few enterprises need. So, the buyers have more power, they can negotiate.
- Bargaining power of suppliers: If a company has many suppliers, he can buy his raw materials from the one with the best offer if there are few suppliers he has to accept to price forced to him.
With all of above you will be able to spot the industries you want to invest in.