9 Tips for Sector Investing

Identifying sectors on the way up enables you to narrow your stock search and focus on stocks apt to rise the most in coming months and years.

However, just because a stock is in a sector that is on the way up does not mean that particular stock is a good investment.

You also need to look at factors such as:

Share price performance during the last 1 to 5 years (it should have gone up at least 100%)
Strong fundamentals (for instance, I prefer price-to- earnings ratios below 20) AND
Position within their industry (the highest-ranked stocks tend to perform the best)

Here are six tips for sector investing:

Tip #1: Check out stock and sector performance

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Thoroughly investigate a stock before you invest. The more money you are considering investing, the more research you should do.

You can find free detailed information on most stocks at:

• Big Charts (http://www.bigcharts.com) Provides a huge amount of free information about stocks, including prices going back 10 years, annual reports, SEC filings and technical analysis.

• BusinessWeek (http://www.businessweek.com) BusinessWeek can be found on newsstands throughout the world. Every issue lists best- and worst-performing groups for the previous month and the last 12 months, plus information on sector mutual funds and reports on returns from equity funds throughout the world.

• Investor's Business Daily (http://www.investors.com) Published five days a week. Every issue ranks 197 industry groups. Price $1 per issue at newsstands, or online.

• Standard & Poor's Industry Surveys (http://www.standardandpoors.com) Published weekly. Reports are available for each of the 52 industry groups mentioned above. Each booklet is usually 30 to 40 pages long. You can also find copies at many public libraries. Or you can order online.

• Wall Street Journal (http://www.wsj.com) Also provides a wealth of information on stocks and sectors.

Tip #2: Never invest more than you can afford to lose

If you're not wealthy, you should keep the lion's share of your assets in a tangible form (bank accounts, CDs, cash, precious metals in safety-deposit boxes, and real estate).

If you have less than $20,000 to invest, you should keep most of it in mutual funds. Many such funds invest in specific sectors, such as national defense or mining.

Tip #3: Diversify

By spreading your dollars out over a number of different types of investments, you greatly decrease your risk of loss. We recommend diversifying into six different broad asset classes: large-cap, mid-cap and small-cap stocks, international investments, bonds and precious metals.

Tip #4: Put stop-losses on all of your investments

In past decades, you could have done very well simply buying and holding stocks for many years or even decades. In today's volatile markets (witness the Dot-Com and Telecom crashes), you need to insulate yourself from major harmful market fluctuations.

We recommend having your broker put a stop-loss on each and every investment at no more than 10 to 15% below the high. That way, if the stock drops, you minimize your losses and maximize your profits - avoiding disasters like the one that occurred in 2000.

What if a stock goes down 20% and then goes back up? In that event, you can reinvest, secure in the knowledge that you avoided a 20% loss.

Tip #5: Invest in the best-performing stocks in a sector

Some defense and resource stocks have gone up anywhere from 200% to over 1,000% in the past five years.

While past performance is no guarantee of future performance, the smart money bets on winners.

In general, only invest in stocks that have gone up at least 100% in the past three years, and avoid "penny stocks" (those priced under $10) - unless you are an expert investor.

Tip #6: Time your investments

The best time to buy shares is when they have just begun to go up and when volume is simultaneously increasing sharply - indicating a large amount of institutional purchases from insurance companies, pension funds and other market movers.

Again, free services like www.bigcharts.com report volume data and institutional purchasing.

Tip #7: Invest in sector mutual funds and ETFs

Mutual funds and ETFs enable you to invest in a large number of different stocks at a relatively low cost. There are many "sector mutual funds" - including defense, homeland security, pharmaceuticals, health care, natural resources, oil and even foreign currencies.

A sector mutual fund enables you to spread your risk over many different stocks, virtually guaranteeing a good return if the sector moves up.

An ETF can also be effective.

It is "a fund that invests in a group of stocks selected to closely track the performance of a stock index, such as the Dow, the S&P 500 or a more specific group of stocks - such as AMEX mid-capitalized stocks or NASDAQ energy stocks only."

Fund managers are usually adept at investigating different stocks and they select investments they feel are comparatively safe and will perform well.

Tip #8: Invest in foreign currencies

The easiest way to do this is to open a foreign-currency-denominated bank account or CD.

Currencies we recommend are: Swiss francs, New Zealand dollars, Australian dollars and Indian rupees.

You can buy FDIC-insured certificates of deposit (CDs) in Swiss francs, New Zealand dollars and other currencies from Everbank of Florida. www.everbank.com, 1-888-882-3837.

One can also find a number of foreign banks on the Internet. Investing in foreign currencies is legal - so long as you report any and all foreign bank accounts containing $10,000 or more (either individually or collectively) to the IRS.

Tip #9: Carefully monitor your investments

Even if a sector is hot, performance of stocks and funds within a sector can turn on a dime.

Consequently, you should look at the price of your shares at least twice a week and be prepared to sell when they drop.

As mentioned above, we recommend putting a stop-loss on all of your investments at 10 to 15% below the high after you purchase it. Your broker should be able to provide this service for you automatically - but it still pays to keep track yourself.

We do not recommend buying and holding shares because they "might go up in the future."

At the same time you are holding falling shares, you could instead be benefiting from shares that are actually going up - or you could just have the cash.

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