One of the basic lessons in investing is the diversification rule. By not putting all the eggs in the same basket, it is possible to minimize the risk or volatility of a portfolio, that is, by distributing investments in capital market instruments and these in turn in different industrial sectors; in addition to being prepared to optimize your profitability.
The dilemma between risk and benefit.
The more profitability an investor expects, the more risk he is willing to take. Investors are risk averse, that is, for a given level of risk they seek to maximize return, which can also be understood to be that they seek to minimize risk for a given level of return.
It is preferable to have an amount of money now than the same in the future. The owner of a financial resource has to be paid something to get rid of that resource, in the case of the saver, it is the interest rate, in the case of the investor the rate of return or return.
In addition, it must be borne in mind that the human being prefers to have cash, but sacrifices liquidity in the hope of earning interest or profits.
The opportunity cost
It must be recognized that there are always various investment alternatives and the opportunity cost is the rate of return on the best available investment alternative. It is the highest return that will not be obtained if the funds are invested in a particular project instead of another. It can also be considered as the loss that we are willing to assume, for not choosing the option that represents the best alternative use of money.
Diversification
One of the basic lessons in investing is the diversification rule. By not putting all the eggs in the same basket, it is possible to minimize the risk or volatility of a portfolio, in addition to being prepared to optimize its profitability.
The prudent investor diversifies his total investment, dividing his resources among several different investments. The effect of diversifying is to distribute risk and thus reduce total risk.
For this reason, the investor is advised to diversify between fixed income and variable income, within which he should distribute his portfolio in geographical areas, currencies and sectors.
Rotation of Sectors
The rotation of sectors is a good strategy although it is necessary to have special “dedication and discipline”. The investor should know that by rotating sectors he is increasing the risk of his portfolio.
Ideally, invest in each sector at the exact point in the business cycle. For example, you should invest in the technology sector when the economy is doing well, in the industrial sector when "there are times of clear economic boom" and in raw materials when "interest rates of central banks begin to rise."
There are two ways to invest by sector:
a) By purchasing shares.
b) By purchasing funds.
In the latter, it is advisable to be careful with the investments of funds that obtained "excellent results in the last twelve months" since "past returns do not guarantee future returns".
In addition, the investor is suggested to invest in funds with a long enough history to see how they behave at different times of the cycle. Finally, the advantage of investing by sector is that it can become a good vehicle to allocate part of the portfolio to sectors with less volatility and higher profitability per dividend in the market.
| When to invest in each sector | ||
| Sector | Business cycle moment | Characteristics of the sector |
| Defensive consumption | Apparently the economy is doing well but growth is slowing down. The central banks' discourse is not so focused on inflationary fears. Rate hikes are running out. | Defensive. Independent of the economic cycle. |
| Utilities | The economy begins to cool. Interest rates begin to drop. | Defensive. High dividend yield. Regulated sector. |
| Financial | The economy does not recover, rates continue to drop. The mortgage market is reactivated and credit is starting to increase. | Cyclical, but with weapons to earn money in moments of weak economy. |
| Raw Materials | The economy stabilizes. Rates remain low, central banks' discourse changes again. They start talking about inflation as they continue to worry about economic growth. | Very cyclical. Very short but intense period of better behavior than the market. It usually distributes good dividends. |
| Industrial | The cycle changes. The economy begins to grow and interest rates begin to rise. | Cyclic. Better in times of a bullish economy after major restructurings that have "cleaned up" excess costs in the sector. |
| Cyclical consumption | The economic cycle clearly improves. Interest rates continue to rise. Much employment is created. Inflation begins to exceed targets. | Cyclic. The price is highly dependent on business results. Little dividend. |
| Technological | The economy is going smoothly and also has no sign of spoiling. The rates keep going up. | It depends on both the economic cycle and the acceptance of new technologies by the mass market. Low or null dividend. High risk of failure against untested products. |
| Source: Self Trade Bank |
