How to Find the Right Stocks and Sectors

There’s one simple trick to investing: buy low and sell high. That’s the gist of it. Easy, right?

Still, some perfectly smart people are unable to follow that rule despite lots of knowledge about certain companies and sectors. Investing isn’t a science and results are never guaranteed, yet a few intelligent techniques exist when it comes to deciding where to put your money.

Determine Your Goals

Before delving into the details of different stocks and sectors, you should determine your broader goals, such as the length of time you want your money invested and how high your risk tolerance is.

If these funds are for retirement, you can afford to be patient and let the funds sit back for years. This means you can afford to have more patience to see if certain industries turn around. For example, the oil industry is at the lowest it’s been in years, and might take years for a turnaround. If you’re planning to just invest for a couple years and then take out your money, taking such long bets isn’t feasible. Maybe you’re planning to use this money for a down payment on a house, or to pay off bills. If that’s the case, you don’t want your money tied up for long.

There’s a saying that you shouldn’t invest money you can’t afford to lose, as significant losses are possible no matter how prudent an investor you are. That’s why it’s important to determine how much you’re willing to risk. Even in downturns, some companies (like the big blue chips) hold their value better than younger upstarts (such as all those new tech companies). The safer options might be seen as boring and with less potential, but they’re often steadier and safer.

Do Your Homework

Once you’ve determined you have a rough idea of how flexible you are with risk and the timeframe for the investment, it’s time to find the sectors that best match up with your goals. Take a look at historical data and delve into the financials to get a big-picture look at how the sector is doing. If you’re familiar with the industry because you work in the field, you’ll find you have an advantage over the typical investor because you’ll already have a good feel for long-term trends.

You’ll need to answer a few important questions before beginning to invest. To name just a few: How do the future prospects look? Does the industry appear undervalued? How risky is it? These big-picture questions can be taken to the individual level and applied to particular stocks.

Don’t Forget ETFs

A good way to get an overall snapshot of the sector is to look at ETFs (exchange traded funds). Various asset management companies offer their own ETFs based on sectors that consist of a number of different companies. ETFs are the easiest way to invest broadly in a sector and minimize the risk, yet they might not yield the best returns. If you’ve done your research, you can determine the best companies in the sector and invest directly into them without being exposed to the lesser companies.

Researching all these factors for the first time is challenging, as there are many new words and phrases that you may have never heard before. A number of blogs out there feature bold expert predictions about particular companies and sectors. Those are a good place to start to learn the fundamentals, but those picks should be taken with a grain of salt because most of these experts aren’t particularly consistent at picking winners.