Basic Investment Strategies: Stock and Mutual Fund Diversity within an Industry

Basic Investment Strategies: Stock and Mutual Fund Diversity within an Industry

Jun 24, 2018 My Blog by Chester Ray

One of the most fundamental investment strategies is to create a diversified portfolio of stocks across several industries, so that it takes more than one or two unexpected developments to sink your investment strategy and create negative returns that can take a long while to recover from. On the other hand, it’s not as if you must have some kind of position in every single major industry. You can and should avoid any number of industries that you think are unlikely to do well over the interval in which you plan to invest. This is one solid strategy to beat the market overall.

 

Likewise, it’s not as though you can’t have multiple positions within the same industry. Some investment strategies can even create diversity and hedge bets on specific stocks. One person I knew, for example, invested in Kinder Morgan—a major natural gas company—as well as a mutual fund in the solar industry. His reasoning was he expected natural gas and Kinder Morgan to dominate a certain segment of the energy industry, and while he expected solar to continue to perform well, he felt less confident in any particular solar power company. Thus, his strategy and choices.

 

Of course, in the spirit of Bulletproof Shares, it’s worth noting that this strategy is far from being totally risk-free. Investing a significant amount of funds in any single stock is an inherently risky strategy, no matter how good the “tip.” There are other segments of the energy market—perhaps, most notably, home batteries and next-generation energy technologies—that could create innovations that increase their market size to the detriment of natural gas and solar.