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How Should We Choose Which Industries To Invest In?

There are many ways to obtain good investment ideas, and as investors, we can choose between a top-down or a bottom-up approach. Assuming you have decided on a top-down approach, the question then becomes how to pick an “attractive” industry to invest in.

Should you choose industries based on their future potential, or should you stick to well-tested industries with long and illustrious track records? There are many ways to answer the question, so let’s explore some of the options.

Stable but “boring” industries

If you’re a more prudent and conservative investor who wishes to sleep well and eschew excitement, you may wish to look for stable but “boring” industries to invest in.

Such industries are ones that have been around for many decades and provide essential products and services that should continue to be in demand for a long time. Examples include food and beverage, repair and maintenance services, and paint. But, in our current technological age, we still need to be mindful of potential disruption, even for age-old industries.

Nascent, disruptive industries

If you’re a more enterprising investor who places a heavier emphasis on growth, you may wish to look at industries that are on the cusp of a major revolution. Examples include genome sequencing, ride-hailing, and artificial intelligence. Such industries are touted as game-changing and are in the process of altering the business landscape to make everyone’s lives better.

It’s worth noting though that investment opportunities in these areas may not always be available as some of these industries are nascent, and many companies within them may not be listed on stock markets yet. And even if some of these companies eventually go for an initial public offering (IPO), their valuations may be elevated, as expectations are riding high for them to deliver market-beating growth.

Anti-cyclical industries

You may also wish to consider looking at anti-cyclical industries in order to diversify your portfolio. Industries that see stable demand through different business cycles act as a good stabilizer to a portfolio. Some examples would include healthcare and education.

The Foolish bottom line

From the examples above, it’s clear that we have a whole buffet of industries to choose from if we wish to adopt a top-down investment approach. But we need to look inside ourselves to assess our own investment goals and risk appetite before selecting the appropriate industries on which to conduct research.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.