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Say I want to get into stock market. Is it a better to concentrate in just one field. I, for instance, am quite interesting into the aeronautical industry. Should I invest only in the field? Is it a good idea? Thanks.

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  • aeronautical industry R&D, manufacturing or travel ?
    – DumbCoder
    Commented Dec 25, 2014 at 19:53

4 Answers 4

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I don't think investing in only one industry, which you may know well, is very wise. You may want to invest in that industry but you should not restrict yourself from investing solely in that industry.

There are many times when your chosen industry may not be performing very well and other industries are performing much better. If you restrict yourself to just one industry you may be either out of the market for long periods of time or your portfolio may show negative returns for extended periods of time.

You may want to know an industry or a number of companies very well but do not fall in love with them. The worst thing you can do is get emotional about an investment, an investment is there to make you money not for you to get emotional about. Don't restrict yourself, instead look to maximise your returns with investments that are performing better at the time.

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Investing only in one industry may be problematic as it is highly correlated. There are factor outside your (or anyones) knowledge which may affect all the industry:

  • The instability in oil producing region causes the oil prices to rise. While all industry may be affected the travel industry will probably be disproportionately affected.
  • There is danger of attack on airplane. The people will fear to travel so the whole industry will have a loss.
  • The new regulation regarding emission are stricken. This means that part of design of new engines needs to be changed resulting in higher R&D costs (at least in short term).
  • ...

If you are familiar with the industry it may happen that you work in that (ignore rest of paragraph if this is not the case). In such case you are likely to have problems at work (frozen salary, no bonus, position terminated) and you need to liquidate the investments at that point (see many advice regarding ESPP). Depending on your field you may have some inside knowledge so even if you would took a position without it you may need to somehow prove it.

On the other hand diversifying the investment might reduce the volatility of investment. Rise in oil will cause problems for air industry but will be a boom for oil industry etc. In this way you smooth the grow of the investments.

Investing part of portfolio into specific industry may make more sense. It still possibly worth to avoid it at the beginning investor may have trouble to beat the market (for example according to behavioural economics you are exposed to various biases, or if markets are efficient then prices most likely already take into account any information you may have).

(I'm still new to all this so it's mostly based on what I read rather then any personal experience. Also a standard disclaimer that this is not an investment, or any other, advice and I'm not licensed financial advisor in any jurisdiction)

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  • To downvoter: I'd be grateful for explaining what's wrong with answer.
    – User
    Commented Dec 26, 2014 at 6:52
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    Stock Markets are not efficient.
    – user9822
    Commented Dec 26, 2014 at 13:54
  • @MarkDoony people have different opinions on that as far as I can tell - including this site. That's why I use the work "believe" - given the information I have I find the EMH likely, but far from certain, at least with respect to beating the market.
    – User
    Commented Dec 26, 2014 at 19:34
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    if the stock market was efficient we would not have stocks above or below their fundamental value, we would not have analysts valuing stocks at different values, we would not have market booms or market busts. If the stock market was efficient all market participants would have all the information about all the stocks to be able to give each stock its true value and thus price them accordingly. In fact a stock would only go up when its fundamental value went up (say increased its profits) or only go down when its fundamental value went down (say making a loss). This does not happen in reality.
    – user9822
    Commented Dec 26, 2014 at 22:29
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    So you are saying that individual investors are unlikely to beat the market. But I have beaten the market for the past 3 years, and I could name more than a dozen other investors/traders who consistently beat the market. Beating the market is actually not too hard, and one can do it by taking less risk than just buying and holding an ETF that tracks the market.
    – user9822
    Commented Dec 27, 2014 at 6:30
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You are always best off investing in things you understand. If you have a deep understanding of the aeronautical industry, say, you are a Vice President at Boeing and have been working at Boeing for 40 years, then that would be a reason for investing in that sector: because you may be able to better evaluate different companies in that sector.

If you are a novice in the sector, or just have an amateur interest in it, then it may not be a good idea, because your knowledge may not be sufficient to give you much of an advantage.

Before focusing on one investment of any type, industry sector based, or otherwise, you want to ask yourself: am I an expert in this subject? The answer to that question will have a big impact on your success.

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It depends on what you're talking about. If this is for your retirement accounts, like IRAs, then ABSOLUTELY NOT! In your retirement accounts you should be broadly diversified - not just between stocks, but also other markets like bonds. Target retirement funds and solid conservative or moderate allocation funds are the best 'quick-and-dirty' recommendation for those accounts. Since it's for the long haul, you want to be managing risk, not chasing returns. Returns will happen over the 40 or so years they have to grow.

Now, if you're talking about a taxable stock account, and you've gotten past PF questions like "am I saving enough for retirement", and "have I paid off my debt", then the question becomes a little more murky.

First, yes, you should be diversified. The bulk of how a stock's movement will be in keeping with how its sector moves; so even a really great stock can get creamed if its sector is going down. Diversification between several sectors will help balance that.

However, you will have some advantage in this sector. Knowing which products are good, which products everybody in the industry is excited about, is a huge advantage over other investors. It'll help you pick the ones that go up more when the sector goes up, and down less when the sector goes down. That, over time and investments, really adds up. Just remember that a good company and a good stock investment are not the same thing. A great company can have a sky-high valuation -- and if you buy it at that price, you can sit there and watch your investment sink even as the company is growing and doing great things. Have patience, know which companies are good and which are bad, and wait for the price to come to you.

One final note: it also depends on what spot you are in. If you're a young guy looking looking to invest his first few thousand in the market, then go for it. On the other hand, if you're older, and we're talking about a couple hundred grand you've got saved up, then it's a whole different ball of wax. It that spot, you're back to managing risk, and need to build a solid portfolio, at a measured pace.

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