This week on the Mullooly Asset Management podcast Tom and Brendan discuss sector-based investing. To begin the discussion Tom had a statistic to share from a study done by Professor Benjamin F. King of the University of Chicago. The statistic showed that 80% of the risk in investment results comes from getting into the market at the wrong time or simply investing in the wrong sector. 80% is a hefty portion of the risk involved, and yet many people are still out there focusing on picking the right stock.
Many investors get wrapped up in what they hear on TV and the radio. All you’ll hear on financial news programs are their promises to show you “today’s hot stock”. Realistically these news channels are using these alleged “hot stocks” to keep your interest level high. If you think about the statistic that Tom shares at the beginning of this week’s podcast, then you’ll realize that picking the right stock really isn’t important. The main focus of investors and their financial advisers should be on the current market conditions and favorable sectors.
Tom explains how getting invested in a specific sector used to be much more difficult. When a favorable sector was identified, financial advisers used to have to buy each stock individually. ETF’s changed all of that. ETF’s allow us to enjoy the sector-based investing that we talk about in the title of this podcast. Your financial adviser can buy entire sectors quickly and easily. Sector-based investing also allows us to define the risk and place stop orders on investments.
Brendan asks Tom to go over a recent example of sector-based investing as well. The example Tom gives is perfect, and is quite recent (January of 2013). The bottom line is that investors and advisers alike should stop getting so hung up on the latest “hot stock”. Focusing on the market conditions and favorable sectors when investing will yield much greater results.