Market Sectors & Companies Cliques
As we covered in our page on Portfolios & Diversification, the overall objective of building a healthy portfolio is to get rich minimise risk and maximise returns.
A good place to start idendifying risk is to look at stock market cliques, aka Market Sectors.
The Lunch Table
In every school there are cliques. Close knit groups of people that generally sit together during lunch. These grouped are based on common attributes & interests - athletes, tech nerds, musicians, popular girls, and so on so forth. A Market Sector is basically a clique of companies.
A company's market sector will tell you generally what kind of company it is, the service that it provides, and most importantly insight into what may or may not impact that business's success.
For Example:
CIMB (1023) is a Corporate Bank and is naturally placed in the “Finance” Market Sector, meaning that they will sit with other similar companies such as MayBank (1155) or Public Bank (1295). On the other hand, InNature (5295), a retailer specializing in Personal Care Beauty Products sits in the “Consumer Products” market sector.
While each company has its own strengths and weaknesses, a market sector will exhibit its collective companies’ strengths and weaknesses.
The Perfect Friend Group
Spreading out your investments across multiple Market Sectors is an easy place to start decreasing your investment risk.
Like in life, diversity is the key to safe & stable growth. It’s best to have a portfolio of stocks from a mixture of cliques.
If your portfolio has a 50/50 split between Finance and Consumer Product stocks while your friend has only invested in Consumer Product stocks, your portfolio is going to experience less of a hit if there are economic / political issues and of course a global pandemic. Covid-19 negatively impacted companies in the Consumer Products market sector more than it did the Financial market sector.
By diversifying your investment, you are protecting your portfolio from drastic hits and increasing your chances of positive continued growth. Of course, there are still events that may impact multiple Market Sectors equally, so it is important to remain up to date on the latest opportunities and threats to your portfolio.
Market Sectors
