How to Find the Right Stocks and Sectors

Sep 15, 2022 By Triston Martin

This is John Wooden. John Wooden contrasted the notions of winning and succeeding: Winning is akin to reputation, while success aligns with character. Reputation only lingers, while character lasts long. His experience as a basketball coach for UCLA for more than 27 years shaped his way of thinking about success and winning.

The marketplace works under the same dynamics as the basketball pitch. Some investors win by earning average market returns on their investments, while others succeed by earning more than average, and more times; some investors have a reputation, while others have character. This is what makes investors like Warren Buffet stand out.

Selecting the best stock or sector to invest in is not child’s play and should not be assessed at face value. Just because a stock has been strongly performing recently does not mean it is the best option. Conversely, sometimes a high-performing sector may be the best option for you.

Investors may choose to build their portfolio using more passive sources of income, such as ETFs or buy-and-hold strategies, while others may opt for a more active sector. To help you decide which option works best for you, here is a summarized overview of the necessary steps to make the best decision.

Important factors to consider when selecting the best stock and sector options

Does it align with your personal preferences?

Most investors ignore their likes and dislikes when considering the right investment vehicle. They will opt for the one with the highest returns, even though they dislike the company or sector. While this may work in some instances, using our winning vs. succeeding analogy, you are best placed if you decide on a stock or sector that you will stand by even in its low financial periods.

Conversely, do not allow your personal preferences to control your investment options too much. You may love lamb chops, but maybe investing in a restaurant that serves them is not the best option. The chef who prepares your favorite lamb chops may be declared redundant, and your interest in the restaurant may wear down because the lamb chops are not as delicious. This does not mean that the restaurant’s market value will reduce per se, just that your personal interest in the restaurant where your investments lie has ended.

Do not pick stock or sector options just because there is widespread hype about it. Consider your options both qualitatively and quantitatively.

Does it align with your individual goals?

Investing is very person-centric and unique. The worst thing an investor would do is to go for an option that worked out for their compatriot without considering other factors. The diverse factors that could make a difference in terms of investment goals include:

  • Older vs. younger investors. Older investors mostly direct their money into strategies that preserve capital, while young ones may want to diversify and increase their portfolios.

  • Passive vs. active investment. Some investors may prefer a more laid-back approach, while others may always want to be in control of their possible returns.

Is its market value impressive?

This factor is not first for obvious reasons; value before money. However, the importance of this factor cannot be adequately overstated. There are several ways to measure a stock’s price currently. One of these is by using the price-to-earnings ratio. This is calculated by dividing the price per share by what each share has earned over a single year. Other financial metrics to consider include dividend yields, dividend growth, and price-to-sales ratio.

A rule of thumb is never to use a singular metric in isolation; rather, one should consider diverse financial metrics to make a more informed decision.

Is your portfolio diversified?

Have you ever heard of throwing your bread into many waters? This not only works in philanthropy but also in stock and sector investment. Diversifying your portfolio does this:

  • Minimize losses by spreading risk.
  • Maximize returns by increasing profit-earning avenues.
  • Provide you with more diverse experience and expertise.

However, it is an ill-advised move to shift from a singular investment strategy to a diversified portfolio midway. Before you select which stocks and sectors you want, first decide whether you would want them diversified or not. Investing in sectors requires more intensive decision-making, mainly because hopping from one sector to another may be risky.

Short-term wins should not cause you to shift from one sector to another. If completely unsure, expand, not reduce. And when push comes to shove, reduce completely and start over differently. Contact your stock analyst to find out where you best stand before launching.

Can you track its performance?

Tracking entire sectors may require using Exchange-Traded Funds (ETFs) to track the sector’s performance. This information can be found easily on the internet. Your part is to constantly and consistently track its performance before and after investing.

Research widely on how certain stocks have performed in the past are performing now and future projections of how they will do in the market. Tech stocks are mostly forecasted to yield higher returns in the future.

Top-down or bottom-up investment?

Top-down investing considers the whole market from the bigger picture, is faster, and used by beginner investors. Bottom-up focuses more on the individual company in which you would like to invest in. In contrast, top-down investing requires that you consider macro factors, such as Gross Domestic Product (GDP), economic inflations, and employment rates, bottom-up looks at more micro factors, such as cash flow, dividend yields, and other financial indices and statements.

Whether you prefer starting from the top and then scaling down, or starting from the bottom and then scaling up, both top-down and bottom-up investment strategies have their own pros and cons.

When you are sure you have found the right stock and sector for your investment option, think it through again. Consider the option numerous times before actually pulling the trigger, because some investment decisions are too complicated to come out unscathed.

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